I am fresh from reading the latest from John Makin and, as usual, I agree with a lot of his observations but conclude that he is much too negative on his predictions.
Makin's “What Next?” can be summed up in two words, excess capacity. This worry works itself into virtually every one on Makin's dismal predictions. Usually “global” or “massive” to make the situation seem particularly dire precede the words. This is hardly a new concern in the history of the world's economies. It is just that today the world is much more connected and therefore “crises” in far away, little understood places sound more frightening.
So what? The world had a capital-spending boom and now we have a bust that has caused a recession. This recession has caused bankruptcies, debt defaults and bank failures. Shocking ? Actually this is a well-understood sequence of events that has been repeated many times in many places. The solution is always the same - economic stimulus via fiscal and monetary means. Now I'm sure we could spend all our leisure hours debating which is the preferred method, but regardless of the outcome of that debate an ample dose of both is already being, or shortly will be, applied and will certainly have the same positive result that it has always had in the past. I am sure someone will now bring up Japan as the new model of why stimulus doesn't work in a post-bubble economy. This worry is misplaced, in my opinion.
Since Lee asked for my prediction in an earlier post, I will give it. I anticipate that the bottom will soon be reached in world growth rates – probably coincident with a slight slowdown this year in the U.S. economy. One by one the “emerging” economies will begin to reemerge and excess capacity will slowly be filled. I wouldn't be surprised if Japan confounded the consensus and began to grow too. In a year or two business persons throughout the world will notice this and once again begin building capacity, placing renewed demand on world resources. After another year or two, the words “shortages” and “allocation” will have replaced Makin's “excess capacity” as familiar sources of worry. Then the cycle will repeat. I don't see anything new out there that will change this oft repeated pattern.
-Robert
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