I have a varying opinion from that put forth from Gavin Januaras.
I agree that we are in a bad economic downturn. We have a glut of manufacturing in the world. I say as bad as it is in the US, it’s worse elsewhere. I believe we are facing the “perfect financial storm” along the lines of the Great Depression. If deflation hits the US, like it has Japan, then it is quite simply “game over.” Here’s some facts and my reasoning.
US corporations are in their most indebted state ever. Their pricing power is quickly being eroded in some industries, complicated by regulations that reward failure. The bubble market of the late 1990’s wasn’t only in stock but also in corporate debt. As this debt matures, companies are finding it hard to roll this debt over at an acceptable interest rate. Banks are becoming quite tight fisted and secondary equity offerings are currently out of the question as they would lead to what is now believed unnecessary dilution of the owernship interest at inadequate prices. In two years, I believe you’ll see a lot of companies wishing they had done the equity offerings now. This leads to “fire sales” where quality assets can be bought on the cheap, if anyone even has the money to buy them. Chapter 11 bankruptcy is really being abused lately by airlines and telecommunications companies. Out of all the countries in the world, I think the US is the best positioned, due to consumer demand oriented, not export demand oriented. It also has the fewest regulatory problems, most transparent financial markets, and world’s biggest exporter and importer of goods by a couple factors. Also in the industries that the US dominates, wages are not an issue, infrastructure is in place, and required skills only adequatedly supplied or obtained in the US. I think trade disputes will get more press as manufacturing suffers in the US.
Japan and the rest of Asia might someday realize that foreigners and foreign products are desirable for the economy. They might learn about this mysterious thing called “consumer demand.” This means not jacking your own citizens by forcing them to only buy from gov’t sanctioned and endorsed monopolies/cartels, but actually offering them a choice. This is where we are going to see some real pain if the US economy goes south. All those factories and workers idled because they’re products aren’t being bought. People might argue the China point, but I feel it’s a non-issue for a country that purposely manipulates its economy. We are just one financial disaster from watching everything being nationalised in China. I don’t think people realize exactly how much control the government has in business in Asia. Currently it is cheaper by a factor of 100 to form a corporation in Hawaii for Japanese citizens doing business in Japan than it is for them to just form the corporation in Japan for the same purpose.
Africa is a non-issue, just above Antarctica and just below the Middle East. It will be interesting to see how the US affects OPEC with its influence in Iraq in the next 2-5 years.
Europe is a house of cards in my opinion. The Lisbon Accords are quietly being dropped as we speak. Europe has significant structural problems without the will to quickly implement necessary action. European companies were on a similiar big debt binge as their American counterparts, just without the equity abuses. The British are doing well, just need a weaker pound. France is facing some serious problems, due to opposition to the US-led war in Iraq. It’ll be interesting to see how Chirac handles it. People like to point out how he got 80-90% of the vote in the last election, but fail to mention his challenger was similiar to a French clone of Ariel Sharon(who makes GWB look like a peace loving hippie). Schroeder is a lost cause. Hopefully Germany has the fortune to have it’s PM have a heart attack and die quickly. Here is a man who completely dodged Germany’s many problems, admitted that if he didn’t lower Germany’s unemploymant rate, he shouldn’t be elected and then just pandered to voters on a anti-US stance to get elected. He makes GWB look downright respectable IMO. This has gotten Germany the 3rd largest economy in the world where? Let me tell you, increased unemployment, possible deflation, and failing to meet the terms of its own idea the Economic Stability Pact(?). So business are closing and Germany is also losing its manufacturing base. I think the US could use a healthy dose of Europenaism, and likewise for Europe.
So unless the US picks up and I don’t see a quick turnaround. The US is the world’s economic superman. Basically as things look, we are in for a long economic downturn worldwide. The US will lose some manufacturing, but will also gain jobs in other fields. Unions are waking up to the fact that they are becoming irrelevant to their members if their members do not have jobs. I’ll be happy with 1% growth and no deflation for the next 5 years. Eventually I see a world where cost of capital and regulatory enviroment determine where things are made. I see a lot of dominance in this area for the US.
I think we have only seen the beginning of the problems. It was couple years after the 1929 stockmarket crash that the Great Depression got into full swing.