We might say that over 2012, the global economy retained some stability, but its main problems didn’t go away: overwhelming debt, high unemployment and very slow recovery. These trends are going to continue in 2013. But there may be a light at the end of the tunnel by the summer, should confidence in markets and consumer spending increase, debt levels begin to noticeably drop and exports to emerging markets start picking up.
The basic problem stinting growth is this: The ratio of the amount of debt to the capabilities of the economy’s productive forces is too high. This includes not just public debt, but personal debt, student debt and inter-business debts, all of which combine to several times the size of the gross domestic product at national and global levels. This load is inhibiting investment in growth factors, such as the exploration of new markets, hiring and research.
Much of what happens in this economic year hinges on the settlement reached in Washington over the impending debt limit negotiations. President Obama may have averted economic collapse over his first term and put in some regulatory measures on the financial sector, but this has all been done at the price of record debt accumulation on the accounts of the public purse. While ratings agencies have also suffered amidst the economic decline, another cut of the U.S. bonds rating would reduce investor confidence, and likely prompt another round of QE on behalf of the Federal Reserve, buying up long-term yields to bolster investor action. The risk here is that the Fed can keep doing what it’s doing only as long as fresh foreign (and domestic) direct investment is flowing in the U.S. Since investor confidence is not immeasurable, that liability cannot be ignored forever.
Precisely because of low consumer confidence and an emphasis on reducing debts rather than assuming new ones, interest rates are going to remain at historic lows of near 0% for the consecutive year in North America and Europe. Conversely, they will likely go higher in China, where the risks of an overheating economy remain very real and the new Chinese leadership seeks to overhaul the economic model from primarily export-led to one more that is more domestically-driven over the next decade. This measure would cause some painful, but necessary economic distress, if bigger problems down the line are to be averted.
Some of the big risks and questions on this side of the world will be related to how the deleveraging of massive debt loads happens, in order to give breathing room to the economy. The student debt bubble is going to be one of the most serious issues, as it has already surpassed a trillion dollars in volume. Lackluster employment prospects for newly minted professionals remain a serious impediment, which leads to the default of many cases. Even if it is already bursting, its growth will continue into 2013.
More systemically, Greece has already set the precedent with debt write-offs, combined with austerity politics to keep the country barely fiscally afloat. It is likely that the same could happen with Spain, Portugal, Italy and Ireland, as they have also been suffering under immense debt loads for the last five to six years. We could see the European Commission approving debt write-off as a legitimate tool on the European level to solve its economic problems faster, but suffer heavier losses in the process.
Austerity politics around Europe and in North America have ultimately failed to work in resolving debt, restoring employment and driving growth, at least in the context in which they operate. Austerity can work effectively in a setting that promotes a higher rate of saving in both society and state, when budgets aim to be balanced or at a surplus over a medium or long-term perspective. It also should be coupled with responsible investment founded on the real economy rather than speculative bubble-making, as has been the case in recent decades. When overwhelming debt levels assume an inertia of their own, we can only keep up by adding to it until it crashes.
Deleveraging the obscenely large ratio between the level of debt and the real economy is going to be the primary economic battle of 2013. It is a trend that would take at least a decade to unfold without shock therapy to the system. In sum, we can expect depressed economic activity, gradual realignments in the labour market to reflect new realities and ongoing political battles about raising the U.S. debt ceiling. We will also seeing write-offs become a mainstream debate topic, and the coming crisis over the student debt bubble will boil over into this year and next year.