Published: August 17, 2009 08:59 am      

Response to economy will affect history

August is a traditional vacation month, a last hurrah before the onset of autumn. Many spend their day relaxing with something on their reading list.

Some of us take the opportunity to read and consider major economic shifts. Possibly not, but allow me to posit such a thought.

Changes in a paradigm are difficult to discern as they occur. Such changes can be pronounced but may be no more than a passing fad. This summer we noted the 40th anniversaries of the manned landing on the moon and Woodstock, yet 10 years after each, manned lunar missions were a memory and the counterculture had evolved into the “Me Generation.”

Twenty years ago the Berlin Wall came down amidst claims of the end of history and final triumph of American-style capitalism, at least the 1980s version. This moment in history may too have passed.

U.S. households have lost 20 percent of their net worth, 18 months into this recession, from a peak of $64.4 trillion in mid-2007 to $51.5 trillion at year end 2008.

About 2/3 of the decline was due to lower financial asset values and 1/3 attributable to home values. This decline should be compared against the median family income of $50,000, which has shrunk in real terms since 2000. The size of household debt reached 130 percent of income in 2008. The domestic consumer is in a state of shock and consumer spending makes up 70 percent of gross domestic product.

A key factor to sustained recovery is when will consumer spending grow at normal levels? It would appear not any time soon.

Another key restraint is the financial sector. Global financial institutions report $1 trillion of losses on U.S. originated assets. The IMF has projected that total losses will reach $2.7 trillion, reducing banks’ underlying capital and their capacity to make loans. Over $13 trillion in support to the financial system has been provided in various ways by the Treasury, Federal Reserve and FDIC.

The United States is likely to be more inwardly focused and constrained by unemployment and fiscal pressures. We are likely to be preoccupied with repair to our economy and provide less leadership, increasing geopolitical instability. Even after the economic damage, the GDP of the U.S. is nearly double that of any other country. Much of the world blames U.S. excesses for the recession and has put its model of capitalism out of favor.

The era of free-market capitalism, diminished governmental role, deregulation, privatization and the openness of borders to capital and trade may be at an end. The role of the state is increasing again, together with re-regulation of markets. Those countries that sought increased capital flows and open trade have been particularly injured.

Global exports have fallen sharply and financial and trade protectionism are spreading. Those countries that insulated themselves, such as India and China, have not suffered as much.

The recovery in Europe will be muted. The Euro-zone entered the recession later than the U.S. and its banks have recognized a smaller share of anticipated write-downs than American banks. European policy response has been weaker and the resulting boost will be smaller. Japan has only a limited ability to introduce stimulus plans and its national debt is already extremely high.

China’s economic growth did slow but its financial system is more insulated from world markets and is mostly unleveraged. Except for coal, it is a resource-poor country but its current economic strength permits offshore investments in natural resources. Its economy has been mainly export driven, but these have dramatically declined in the past 18 months. Much of its announced stimulus is directed at creating or boosting its own domestic demand for its products, reducing export dependence. Commodity-centric countries have also come under economic pressure. Russia is rapidly using up foreign reserves to support its currency and its domestic unemployment rate exceeds 12 percent.

Iran has inflation over 20 percent, oil and gas revenues are expected to decline 60 percent in 2009 and its economic growth is expected to be flat for the current year. Other countries have raised tariffs and other barriers in an attempt to protect domestic industries. The IMF has predicted that millions will become unemployed or fall into poverty, sowing seeds for social unrest.

The current economic problems may increase geopolitical instability, with less global leadership, coordination and coherence. Changes caused by the current downturn could be destabilizing to the global order of the past several decades. As we sort through the current events, the effects may be profound in both economic and geopolitical consequences.

Will the current adversity tap into the genius of American adaptability?

Will necessity produce innovation and invention?

The 1960s and 1970s produced huge social and technological change we take for granted today. The lasting impact of how we respond and react is an answer for history.



David Helscher is a senior vice president and trust officer with Clinton National Bank.