Who would have thought just 18 months ago that a member of the eurozone, the most elite club of economies in Europe, could have a worse credit rating than Pakistan? And yet this is the case for Greece today, perched on the verge of a debt restructuring; two other eurozone countries (Ireland and Portugal), meanwhile, are already in Europe's intensive care unit, receiving large bailouts.
And who would have thought that a rating agency would dare question the sacred AAA credit rating of the United States, the sole supplier of global public goods such as the international reserve currency (the dollar) and a financial system that serves as the nexus of international capital flow? Still, that's exactly what Standard & Poor's has done: In August the agency downgraded the United States' AAA status to AA+, citing policymaking uncertainty in Washington and the country's lack of a long-term plan to deal with its fiscal problems.
And who would have thought that the same country, which is renowned for its flexible labor markets and dynamic entrepreneurship, would experience a persistently high unemployment rate? Well, this is the case for the United States, where unemployment is stuck at around 9 percent, unemployment among 20-to-24-year-olds is a staggering 14.5 percent, and the related joblessness problems are becoming increasingly structural in nature. COMMENTS (6) SHARE: Twitter Reddit Buzz More...
There are, of course, several bespoke reasons for these developments. But together, they speak to major realignments that are fundamentally changing the character of the global economy and how it functions. Three things in particular have had a significant influence, and they will continue to shape the world we live in for years to come.
First, too many advanced economies face problems rooted far below the surface, in their balance sheets and in the structure of their economies. This is not just about the unemployment crisis and the rapidly deteriorating public finances that, in cases such as Greece's, have reached alarming levels. It is also about malfunctioning housing markets, a continued breakdown in bank credit intermediation, and weak political leadership in the midst of messy party politics.
Second, rather than deal with these structural problems, policymakers have preferred to kick the can down the road. As a result, the problems have festered and become more entrenched, and the risk of adverse contagion has risen.
This is most obvious in Europe, where a liquidity approach -- involving piling new debt on top of already crushing obligations -- has repeatedly been applied to Greece's debt solvency crisis. This has also transferred massive liabilities from the private sector to Greek and European taxpayers and contaminated previously healthy institutions such as the European Central Bank. It is also the case in the United States, where unprecedented stimulus spending has failed to sufficiently reignite growth and job creation.
Third, several emerging economies have hit their developmental breakout phase, largely undeterred until now by the misfortunes of the developed world. You see this in Brazil, China, Indonesia, and several other countries. In the process, they have gone from strength to strength, so much so that their economies have started overheating at a time when more established countries are languishing. This is new territory for the global marketplace, one in which the less mature countries are more robust and resilient than their advanced peers and are able to grow sustainably at high levels while also strengthening their balance sheets.
Absent a major policy mistake -- a lurch toward protectionism, disorderly defaults, or disruptions to the international payment and settlement system, for instance -- we should expect these global realignments to continue.
It will take several years for the advanced economies to fully rehabilitate their balance sheets and restore the conditions for high growth and employment creation. In the meantime, income and wealth distribution will become even more skewed, morphing from an economic issue into a sociopolitical one. 12NEXT Save big when you subscribe to FP.
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Mohamed El-Erian is CEO of investment management firm Pimco and author of When Markets Collide.
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SEO KENT
5:14 AM ET
August 15, 2011
Where to next?
How is it possible that the EU and America have fallen foul of these huge deficits. These are countries which between them and in history have been the super-power of the world. I think it is good that we have countries such as Brazil, India and Russia have risen up to the challange and expanded their economy. But the EU and America seriosuly need to to think long and hard about where they are and how they can start adding some value again. seo kent
MRMONDAY
10:11 AM ET
August 15, 2011
None of these major problems
None of these major problems come as a shock, and the downgrading of the US credit rating might be the only way people take notice. The economic policies that never work from home will not work abroad, and the US needs to finally address its serious structural problems.
NEWSBRINK
1:25 PM ET
August 15, 2011
Will anyone do anything?
Nobody will really do anything. People may complain about the economic crisis and what not but really in America people have too much to lose. Do we really want to lose our LED tvs and our cool cars with gps? Probably not. In the end we will go back to the ballot box and continue to participate in the same system that got us here.
http://www.newsbrink.com
BIZNETS
1:58 PM ET
August 15, 2011
Just a natural cycle of events?
Maybe in the grand scale of things this is just natural progession? the West first with England and Norhern Europe via the Industrial revolution then Japan, as the workforce prosperred and living conditions improved the demand for material wealth increrased, wages increased and the cost of producduction soared, hence the move to the east for cheap labour, China and India anyone!
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DAVEMCLANE
6:18 PM ET
August 15, 2011
In a word
The word that forms the foundation for all of the above is "growth" which has two very different meanings. It typically and in this case means growth in the number of zeros added to the dollar price of things while the non-monetary amount of goods and services is something quite different.
As long as they move more or less together no great harm comes to the working class -- although damage is done to those who save their dollars for a rainy day -- but somewhere along the line, say around 1970, these two kinds of growth began to separate and that's what we have today: lots of dollars, less and less non-monetary goods and services.
This of course is way to simple but I do believe it's the bottom line.
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8:15 PM ET
August 15, 2011
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