World Economic Perspective: Part I

Economic experts and financial pundits are calling current economic conditions – a harsh recession similar to that of the early 80’s. The average worker, investor, and retiree are calling it another “great depression.” There is truth in both perspectives. The world-wide financial collapse which began last summer appears to be coming to a slow but eventual end with the first stages of a recovery (stabilization and recovery of the lending markets) already started – at least in the U.S. That is not to say hard times are over or more bad news is not in the offing. In fact more bad news and business closures will certainly occur before this ends and unemployment, which always lags behind in any recovery, is likely to hit levels not seen in over a half century. All recessions in Post WWII America have ended the same way; with the return of the America consumer. And that critical event has yet to happen. But the conditions that started this crisis – the meltdown of the lending markets – do appear to have ended. The next phase will be a resumption of normal lending to businesses. How long it will take before the rest of the economy catches up and how much of the economic landscape will be left is the $100K question. It could be another year before the U.S. free fall stops and another 4 to 5 years before a full recovery occurs. Longer than that, if more economic pillars are toppled or the financial lending recovery stalls or is reversed.

A number of U.S. institutions and possibly even whole industries may fall be the way side before this recovery is completed. What we will see in the coming days is the loss of some venerable institutions, a realignment of others and the creation of new industries. Several of the mega banks will probably not weather the storm and will either be sold off in pieces or be swallowed up by their more adaptable and financially sound competitors. The American automobile industry will survive in one form or another but it will never be the same. A smaller Ford will probably return to private holdings and GM will be greatly reduced in size in order to return to profitability. Chrysler will most likely continue its decline and then quietly fold when FIAT is done with it. The same consolidation and downsizing will occur in a number of other industries including the U.S. defense industry which is about to hit hard times.

As far as the creation of new major industries, that will depend primarily on the recovery of the lending market and even more on the Federal government. If the Obama administration is able to create an atmosphere of stability and focus government funds into the establishment of a new energy industry as opposed to just subsidies, then the potential for America to lead in this area is high. There are plenty of opportunities where American technology, labor, and capital can be successfully refocused and energy is just one. It is important to remember that America continually re-invents itself and the situation we face today is intrinsically no different than other crisis this nation has faced.

The world is no longer the world it was 18 months ago and something new is still baking in the oven. What is clear is that the decades long spending spree of the American consumer, bankrolled by Chinese exports and Middle Eastern energy dollars has finally ended. America’s ability to hemorrhage billions of dollars in negative trade deficits was predicated on those dollars coming back into the U.S. in the form of investments and loans. The dollar and the U.S. economy no longer look like 24 karat gold and the fear by foreign investors of jumping off the merry-go-round is not as frightening as it once was since the ride has nearly stopped. The funding of the Second World’s economic development via U.S. investments and in some cases the actual funding of key government programs has also ended. The Icelands and Hungarys will not invest in Wall Street to the tune of billions again.

While the foundation for a U.S. recovery maybe in place, Europe, Latin America and Asia are another matter. Part II: Europe and the Economic Recovery.