I am constantly surprised at how little I know. I was reminded of this because, with the G20 meeting underway in Canada, I did a quick tour of various economists' blogs. I am simply not as up to date as I should be!
Earlier in June in Economic clouds gather, I expressed a somewhat pessimistic view on the economic outlook. Storm clouds have continued to gather, with the current G20 meeting split down the middle on the need for fiscal consolidation vs continued expansionary activities. I was reminded of the 1970s when something of the same split occurred. Then, as now, one issue was the willingness of Germany to undertake economic expansion. German memories of the hyper-inflation after the First World War still run deep.
I presently lack the detailed understanding of the numbers to make really sensible comments. However, I would point to a few things that I think to be of importance.
The first is the continued debt overhang associated not so much with Government borrowings, but with total borrowings in the period leading up to the GFC. I am not sure of the real level of impairment in balance sheets, but it is probably substantial.
Here, I think, we need to make a distinction between firms in general, the finance sector and Government.
At least in Australia, ordinary company balance sheets have been significantly improved. In the absence of a total economic crash, there is not a general corporate debt problem. Firms have the capacity to increase debt to fund expansion. With the exception of China, I think that the same process has been happening elsewhere.
Where the impairment continues to be substantial is in the now interlocked finance-government sectors. As best I can understand it, the real problem with Greece from a global perspective lies not in the size of the Greek economy or even Greek debt in an absolute sense, but in the potential flow-on effects to a banking sector within Europe already weakened by the GFC. I am sure that I am putting this very simplistically, but I am trying to keep it simple for my own sake.
There is a lot of discussion at present about the possible end of the Euro and the damage done to the EU by the Greek crisis. The first is possible, the second certain. But what does all this mean in the type of time horizons we are talking about, say the next two years?
My best guess is that Europe will muddle through. However, this will come at the cost of very low economic growth.
In considering this, I think it helpful to remember that Europe already faced long term structural problems at the time the GFC hit from a combination of demographic change with domestic economic inflexibilities in areas such as the labour market. Current problems compound these difficulties. The practical effect of the GFC may be to force Europe to deal with some of its structural problems now rather than later.
Given this, what about the US? Again, I don't really know! Looking at a two year time horizon and taking account of US economic imbalances, my best guess would be very slow economic growth.
All this may sound very depressing, but I wonder about this. Keeping my simplistic Jim hat on, world resources at any point in time are limited. I am not talking in an environmental sense here, just an economics one.
If China, India etc are to grow faster than the world average, then they have to attract additional resources. Given constraints on absolute growth, faster growth in one area implies slower growth in another. Looking at things this way makes me wonder whether global policies designed to accelerate growth in all countries could ever achieve their desired effects at a time of fundamental economic change. Its a bit like all companies in a sector setting growth targets greater in aggregate than the sector's possible growth; it can't be done!
What does this mean for Australia? I think that it means that we will see continued demand for our minerals underpinning growth, but without the type of absurd windfall prices that some have come to expect.
What do you think? Does all this make sense? What am I missing?