In April 2007, New Century Financial Corporation filed for what was then a little noticed bankruptcy protection. Their mortgage-backed securities had become worthless and by summerBear Stearns began liquidating hedge funds. Come autumn, Britain’s fifth largest mortgage lender Northern Rock was on the ropes propped up by the Bank of England. The rest is well known history.
Five years on, after bank failures and bailouts, foreclosures, and rising unemployment, the crisis that started as an obscure financial scheme has led to an unusual triple failure in all three of the world’s traditional growth engines, the United States, Europe and Japan. Though boom-bust cycles are nothing new, they tended to peak and trough at different times. Germany’s early 20th century malaise was paired with America’s roaring twenties. Japan’s first lost decade of the 1990’s coincided with a western tech-driven high.
Now, industrialized nations are facing their greatest economic threat in nearly a century – a troubled middle class losing its purchasing power to drive world growth. If current trends aren’t reversed, and soon, 2012 may be the year the middle fails and a century of economic modernization grinds to a halt.
We’re four years past the 2008 financial crisis when Lehman Brothers failed, millions of home owners went under and economic recovery was but a doe-eyed dream. Meanwhile all three of the world’s main engines of growth, the U.S., Europe and Japan are still mired in tepid recovery, if not reversing course altogether.
Remember when the much vaunted BRIC economies (Brazil, Russia, India and China) were going to pick up where the mighty U.S. left off? And still there’s been no flight of capital half a world away to Sao Paulo, Mumbai, Moscow or Shanghai. Their consumers aren’t driving demand and powering a global recovery. To the contrary they’re also experiencing slowing growth. China and India have revised downward to sub-8% targets.
For the first time in a century the modern age of opportunity that raised standards of living around the world risks returning to a decidedly low-tech feudalistic past.
Why has there been no dramatic re-balancing? Because much of the fast-growth economies of the last decade have relied on unsustainable models to fuel expansion – heavy on investment, light on consumers. To truly build a consumer-driven economy there needs to be access to capital, social safety nets, better healthcare and rising education.
Time to re-think global growth, focus on the middle class and get back to the more important metric, increased opportunity and rising standards of living. The most likely place for that to occur is right back here in the U.S. where the consumer of first resort was born. Mass market appeal drove adoption of every major invention of the twentieth century from electricity and the automobile to the Internet and medical technology. Without the all important middle innovation slows to a crawl.
The U.S. will only regain its critical role in driving growth if the middle class in general, and entrepreneurs in particular, returns to its place at the focal point of economic policy and business development. The role of banks is to facilitate business, not become the main business itself. Better to learn quick that the race has never been to the top, but to the middle, and that’s where the future lies.
Photo credit: Brian P. Klein, 2011, view of Pudong, China
The crowd of 600 or so business and diplomatic leaders snaked their way through the security lines at the Marriot Wardman this morning while flag waving supporters gathered outside. Henry Kissinger set the geopolitical context with a reminder on the need for greater U.S.-China ties. The alternatives would be disastrous for both, he emphasized. In a nod to changing times he mentioned the “old” world of international affairs within which he grew up and operated, a world where states marked territory and competed for influence. Those days are passing and the problems facing both the U.S. and China require cooperation not conflict, he said.
Xi’s thirty-minute or so speech contained no major policy announcements. Long on positive trends in U.S.-China relations and the start of a new era (important signaling for possible future changes) he went on at length of his affection for Iowa and reconnecting an American to old friends from her youth, now ninety years old, in China. The crowd listened politely, but there was no mention of resolving many of the trade tensions that plague the relationship.
Xi said both of our countries will continue to work closely together. The U.S. should recognize Tibet as part of China (an unusual talking point for this crowd), but human rights are an important issue to discuss. The trade deficit can be eased if the U.S. would allow more high-tech exports (a common talking point for the last five years or so).
Overall impression – A seasoned politician at ease with speechmaking, but offering little insight into where China is headed. His visit is clearly meant to renew and deepen relationships, not promote specific policies. It would be politically unwise for him to step out on a limb until the political transition is complete later this year and he consolidates his allies into key positions. Look to early-mid 2013 for signs of any new direction.
Japan’s ability to rebound from its triple disaster in March will require more than just rebuilding; it will demand restructuring in areas from energy and farm policy to decentralization of power, write Brian P. Klein and CFR’s David S. Abraham. (more)
“As a forthcoming article by Brian Klein and Kenneth Cukier in the journal Foreign Affairs points out, Asia’s export-dependent economies – with the important exception of China – have fared even worse than the western economies where the lightning of the financial crisis struck. Taiwan’s exports shrank in the last quarter of 2008 by 42 per cent, while production dropped at a faster rate than the US experienced during the Great Depression. Similarly sharp contractions have happened all over Asia.”
Hopes are high and rising that a near-term China recovery, fueled by an estimated $587 billion stimulus plan and massive bank lending, will be a boon to Japan’s ailing export sector. This new demand is expected to lift China out of recession even before the United States and Europe recover. China’s stimulus, however, is neither large enough nor necessarily supportive enough of foreign imports to have a significant short-term impact on Japan’s rapidly deteriorating economy.