Publications

- May 1, 2017: Vol. 4, Number 5

Past as Prologue: ADISA conference keynote consults history to foretell our economic future

by Mike Consol

One of the compensations of aging is living long enough to see history repeat itself. Count Marci Rossell among those who see past a prologue. The former chief economist at CNBC joined ADISA conference attendees in New Orleans to offer her take on current trends in finance. But, like all economists worth their salt, she did a good deal of prognosticating as well. Look to the other side of the world and Rossell sees a second case of Asian influenza gathering a fever pitch, though with roughly 10 times its force this time around.

Many of us have been around long enough to remember when Japan was the hottest economy on the globe, eating the lunch of American consumer electronic and automobile manufacturers — and seemingly headed for economic supremacy. It was only a matter of time before its economic might superseded that of the United States. Then the enviable Japanese “industrial policy,” which American observers considered sorely lacking in the United States, was revealed for the fecklessness of its government/corporate compact when recession eventually asserted itself. Recession turned into the “lost decade” of economic productivity, and the lost decade (singular) turned into lost decades (plural), and to this day the Land of the Rising Sun is a silhouette of the economic juggernaut of yore. This diminution of power has come to pass largely because the Japanese government simply could not bring itself, even after decades of drowsiness, to reform its system, by enduring the temporary pain of economic Darwinism and letting the weaklings among the corporate herd to fail. How else does a free market economy refresh itself and maintain its vitality?

Now comes the déjà vu experience.

The new Asian juggernaut is China, destined to supplant the United States as the world’s largest (and perhaps most influential) economy. Alas, China’s clockwork-like 10 percent annual economic expansion is slowing — as you would expect an economy to do as it achieves a mass scale. Plenty of volume growth can be achieved at lower percentage increases when an economic system becomes as large as the U.S. or Chinese economy. There is more complexity to the situation, however, as China continues to push its growth numbers and create economic bubbles on the back of debt spending. Many who are closely following China’s economy believe the day of reckoning is approaching.

The way Rossell sees it, a bona fide recession in China could easily push its unemployment rate to 10 percent or higher. That is a situation with which the Chinese government cannot deal, because it translates into tens or hundreds of millions of jobless and restive citizens who could create social tumult on a scale the world has never seen. That would threaten the Communist Party’s rule of the planet’s most populous nation. The alternative is to go the way of Japan in the 1990s by throwing good money after bad to prop-up crippled banks and hobbling economic sectors, such as real estate, while the rest of the economy becomes starved of capital for new projects. The good news is that unemployment is kept artificially low to quell anger and anti-government protests. The bad news is that, like the Japanese economy, the Chinese economy could slide sideways for decades and become sapped of its vitality and global influence.

That is not to say China’s trajectory toward becoming planet Earth’s largest economy will flatline. With 1.3 billion people, China should become the largest of all economies. Still, being the biggest economy does not make it the most influential. If China’s economy turns as sluggish as Japan’s, its ability to dominate the world stage will wane just as surely as happened in Japan.

Rossell foresees China’s eventual economic correction creating a stall in global economic growth, though a temporary one, in part because another Asian economic tiger is on the rise in the form of India. The growth coming out of India will be of a different nature than what we have seen from China. The Chinese government created historic growth in a short period of time because an authoritarian regime can affect economic change very swiftly. The problem: Centrally planned authoritarian-style growth is not sustainable. Economic change is simply too rapid for central planners to anticipate and keep abreast with. India is a “large, messy democracy” but over the long haul its economic decision-making will be organic and sustainable, Rossell predicts.

Think of it in terms of crowd sourcing. In free market democracies there are millions of business decisions being made at all levels of society, versus the centralized authoritarian cabal consisting of a handful of government ideologues and technocrats trying to anticipate the future. Rossell is betting on the horizontal portfolio approach to economic decision-making. So am I.

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser.

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