by Cees BruggemansÂ
On a scale of 0 to 10, do we understand the situation?
Japan (10), yes we do. They are in a deflationary trap, with little notion how to get out of it. Painted into a fiscal corner, with a population unwilling to reform its labour market (no pain, please), they are reduced to doing a Bernanke, creating unlimited monetary liquidity (& national debt) in the hope of a deflating Yen inflating them onto a new growth path through improved net trade. And of late an oil windfall likely boosting the economy.
Russia (10), yes we do. Traditional insecurity in an aggressively competitive world has reawakened the wish to have deep buffer zones against what is seen as a zealously expansionist West on a democratizing crusade. Destabilize anew the old western borderlands, deny them to the Western interlocutors, and where necessary accept any pain imposed by the West. Look for ways to repay the compliment (so far not clear, but ominous, including politically destabilizing actions by backing Middle Eastern proxies wrecking havoc?).
Brazil (10), yes we do. A commodity story impoverished by global headwinds and outmoded domestic economic policies favouring antiquated paradigms. Sounds familiar?
Zim (10), yes we do.
Europe (9), yes we do, I think, even if confusion reigns. Labouring under increasing political strain internally, with complex challenges from both the Muslim & Russian borderlands, with widespread resistance against painful reform, and strong Germanic insistence on fiscal frugality aimed at strengthening the European governance foundations, it is left to the ECB to oversteer with macro support. Parallels with Japan, only not as far advanced into deflating stagnation and much earlier with aggressive monetary support actions. Growth supported by a depreciating Euro, energy windfall and financial confidence boosting ECB bond purchases. Not obvious how this will end, except it will remain for very long a gigantic struggle in motion.
Saudi (8) with Opec in its wake, yes the obvious appears to be true. They have assessed the global situation and finally took defensive action. Economically, global growth and by extension energy growth has slowed, also in China, while advancing technology is reducing energy per unit of GDP at an alarming rate and boosting new high-cost supplies (especially fracking oil & gas, but also vast marginal high-cost oil discoveries), all of it at the long-term expense of Opec. Solution: defend market share, let prices fall and eliminate high cost competition. Unexamined is the financially starving of some unfriendly competitors such as Iran & Russia, by undercutting their state finances and means to wage mischievous war, and by extension in all borderlands throughout the Muslim world, with unclear future repercussions.
America (7), yes we do, kind of. They got growth going again, by doing the right things about banks (recapitalized early), fiscal policy and monetary policy (even if not all agree with what was done). They first right-sized fiscal overreach and are now engaged in a five year attempt to right-size monetary overreach. Barely begun, though. US growth is slow at home (investment & consumption are both drag anchors, confidence as yet not fully restored), while a tepid world economy & rising Dollar are growing external drags. It suggests going slow on monetary policy normalisation. Fed public utterances stress data dependency, with data suggesting September start to a very slow lifting cycle (0.25% every second meeting?). Expect periodic market volatility (mini tantrums) as market reprice while struggling with reality & Fed positioning.
China (5), a bit of an Eastern enigma, playing its cards close to the chest. Is it a good hand or not? Geopolitically, it seems a strong hand, reminding the close neighbours that the neighbourhood resources are its alone, while especially making it clear to Japan what its future status will be. The real challenge is to rise over the West, foremost an economic effort (the true basis of the West’s own geopolitical foundation) without in any way sacrificing own culture or inclinations (central authority of the state). Use Russia where possible, but do not again become dependent. Unfortunately, like the West, China incurred heavy financial & property overreach and this indigestion needs to be corrected. Simultaneously it needs to tweak its economic model, away from export & infrastructure investment reliance to greater share for domestic consumption. Keep modernising the economy, but short of fully imitating Western ways in relying on democratic devolution. A complex act, with potentially many pitfalls, but also a few aces (1.5 billion population, $4 trill in reserves, enormous drive to succeed).
South Africa (3), no we apparently mostly don’t, as much perpetuators as victims. Claiming to be a rainbow nation, acting in the best interest of all, but for long now acting anything but, indeed making a mockery of a great ideal. Pursuing antiquated policy paradigms like Brazil, wanting to be a developmental state like China, dancing to state apron strings directed by ideologues but in a thoroughly confused manner (with unions, democracy, modern private market system in attendance), refusing to address the education and human capital issues thoroughly, unable to uplift its outsider half of the population, failing to sustain critical infrastructure, ending up thwarting (to the point of driving out) critical elements of modernity rather than fully harnessing it?
On the latter score, could it be that we understand our own situation only too well, but perhaps do not dare to express its true nature? For we then would have to face the implications? Many educated, skilled, experienced middle class people are fearfully asking questions where all this is supposed to lead.
