The Peril Of Optimism

TW: One of the things that is most concerning about this Great Contraction is the lack of visibility as to what will lift the world economy out of the slump. This piece supports the notion that the world economy may perform in a hockey stick fashion, a steep dive followed by economies wallowing around at lower levels of activities for extended periods.

They believe the massive stimulus programs and typical cyclical inventory moderation will sooner or later stabilize economies. What they do not see is the next catalyst to get world economies moving at rates other than tepid or essentially flat. How populations would react to an extended period of flat growth following a relatively steep and prolonged period of contraction would be interesting. The world would not end but the hopes and aspirations of many individuals and nations would need to evolve. This would be Japan post-1990 writ worldwide.

Japanese maintain high standards of living but they are not growing. Presumably there would be pockets of growth in various places. Those nations or groups would be positioned to acquire assets in the slower growing areas. Would these dislocations create new frictions? Perhaps but would they be any worse than already existing frictions?

From the Economist:
“But, welcome as it is, optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency. Optimism is one thing, but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths.

...The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.

Consider what that means. Much of the rich world will see jobless rates that reach double-digits, and then stay there. Deflation—a devastating disease in debt-laden economies—could set in as record economic slack pushes down prices and wages, particularly since headline inflation has already plunged thanks to sinking fuel costs. Public debt will soar because of weak growth, prolonged stimulus spending and the growing costs of cleaning up the financial mess. The OECD’s member countries began the crisis with debt stocks, on average, at 75% of GDP; by 2010 they will reach 100%. One analysis suggests persistent weakness could push the biggest economies’ debt ratios to 140% by 2014. Continuing joblessness, years of weak investment and higher public-debt burdens, in turn, will dent economies’ underlying potential. Although there is no sign that the world economy will return to its trend rate of growth any time soon, it is already clear that this speed limit will be lower than before the crisis hit..."
http://www.economist.com/opinion/displayStory.cfm?story_id=13527685&