My basic sense is that we are at the end of one of the six or so major globalization cycles that have occurred in the past two centuries. If I am right, this means that there still is a pretty significant set of major adjustments globally that have to take place before we will have reversed the most important of the many global debt and payments imbalances that have been created during the last two decades. These will be driven overall by a contraction in global liquidity, a sharply rising risk premium, substantial deleveraging, and a sharp contraction in international trade and capital imbalances.
To summarize, my predictions are:
- BRICs and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
Over the next two years Chinese household consumption will continue declining as a share of GDP.
Chinese debt levels will continue to rise quickly over the rest of this year and next.
Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
Within three years Beijing will be seriously examining large-scale privatization as part of its adjustment policy.
European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.
Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.
Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.
Trade protection sentiment in the US will rise inexorably and unemployment stays high for a few more years.
Here are the six key ideas that Mish is emphasising, out of Michael Pettis' analisis:
- China Will Slow Much More than China Bulls and Commodity Bulls Think
Non-food Commodities Take Big Hit
Eurozone Experiment Ends in Breakup
US Protectionism Takes Hold
Deficit Countries Control Demand, Thus Have the Best Cards
Disaster Hits BRICs
If the BRICS are hit hard by blowback from the twin "debt and demography" crisis hitting the developed world, the panglossian investors of North America and Europe will be hard-put to find any rays of hope whatsoever.
As long as world leaders in the EU and the US are caught up in political correctness, welfare state dogma, and the faux environmental ideas of carbon hysteria and resource scarcity, they will be unable to make the necessary changes in course to free their economies from the twin curses of "debt and demography."
Until those crucial changes are made, the economic future looks bleak, globally.