As good as things are in the US, there is one threat that remains to the strength of our economy – the rest of the world.
Europe is flat, Japan is a basket case, and Russia is just beginning what should become an epic collapse mirrored only by their experience 25 years ago. China may be hitting the wall, which for them is a rate of growth less than 8% per year – it’s a catastrophe when everyone has financed today based on huge expectations for tomorrow.
Yet, for all that, the total product of the planet is expected to grow by 3.8% in 2015. The developing world is picking up the Great Convergence and with US leadership should still take us into the next boomtime in 2017. But there are risks all around us.
It’s not possible to understate the strength of the US, especially how it shapes expectations for the next two years. Long term unemployment fell (those without work 15 weeks or longer) fell from 5.8M to 4.2M, accounting for 2/3 of the new jobs created this year. At this rate, by the end of 2016 we will have only 1M people as long-term unemployed, roughly the level seen at the end of the last boom in 2000.
But that’s far from true in Europe. Mario Draghi, the head of the European Central Bank (ECB), warned of three factors that are still dragging down the European economy. They are unemployment, falling productivity, and a lack of structural reforms. Read that again if the gravity of the situation isn’t devastating to you. There’s no work, falling output among those with jobs, and a social structure that is leaching off what little they have. It sounds like a spiral of doom.
It’s even worse in Japan, where they face a whole raft of serious problems. For the land of the setting sun, it comes down to an aging population and a government debt that is now 2.5 times larger than their GDP. Their spiral of doom has been going on for 25 years now and, despite Prime Minister Abe’s efforts, is only continuing.
Speaking of a 25 year spiral of doom, or one that’s come back after 25 years, there is always Russia. Bank collapses are just starting now that the people’s faith in their entire banking system is falling like the Ruble. The situation is quite dangerous, helped only by the fact that the collapse coming in the middle of Winter makes it harder for the Bratva’s kleptocratic government to lash out at neighbors. A Russian implosion is a dire Russian problem, yes, but at least it has less effect on the rest of the world.
So how on earth will there be any growth at all in the world? The short answer is that the Great Convergence, or the arrival of developing nations, is picking up steam again. Rather than rely on sales of goods to the developed world they are starting to see their own demand pick up. They can carry on nicely without Europe, thank you very much. The pickup of the US economy will help, of course, and there will be plenty of room for all of us to succeed.
Unless Europe and Japan drag everything down, of course. Or Russia does something very awful.
With all these threats out there it’s hard to make a good prediction for 2015. If the US is left to its own devices, or simply picks up trade within this hemisphere, we’ll all do well. Oil is cheap not because production has gotten out of line but because conservation has done wonders, along with the weak economies everywhere else. But if that changes, well, 2015 might get more expensive than we plan.
So before we make any predictions for the New Year, we have to lay out the landscape. It’s a very different one than we are used to, but navigating through it is the key to a time of great wealth on the other side of the next two years.
Getting through this will require new allies as our old friends in the developed world continue to falter. The world will have to get smaller, and the gaps between rich and poor will have to narrow. All that will have to happen without any spasms from Russia or China as they trip over their own systems.
How will it all go? Keep your seatbelt securely fastened and do your best to enjoy the ride. There’s a good chance that the future is going to be written in a short time.