The general topic of this newsletter is to take a look at the global economic crisis as that is what is at the top of mind to many of you. Since the first of the year I have made some 30 presentations across North America. Many of these have been to groups of CEOs, who have pressed me to give them an understanding as to what may lie ahead and how long this downturn will last. That will be the dominant theme for this month.
Since late last year I have called this economic meltdown the Great Recession of 2008-2010/11. Evidently that phrase has been picked up elsewhere as in the last month I have begun to read the words "Great Recession" with some frequency. My job is to be ahead of the curve for you with this newsletter. In any case there is no question that we are in the worst recession in our lifetime.
Unlike other recessions this one is much more significant than past recessions have been. Most recessions are downward curves of contraction that ultimately are followed by upward curve of expansion. That is certainly an aspect of the current Great Recession, and of course the one that most economists and media pundits pay attention to in their prognostications. My forecast is that within this framework the contraction or downturn will last all of 2009. The first quarter will be down 4-6% and the subsequent three quarters will be down 1-3%. There is a slight chance of an uptick in the fourth quarter. There will be expansion in 2010 but it will be modest and the on-going feeling will be one of recession particularly in the areas of employment and profit.
There are two additional dynamics that are unique to this Great Recession in addition to the standard contraction definition of a recession.
The first is cleansing. There must be a cleansing in the economic sector and elsewhere as old models, ways of doing business, values and ways to view the world are scrubbed away and purged from what will be our future. The most obvious need for cleansing is in the isolation of the toxic debt that is an overhang to the global recovery. This debt, a result of the damaging "casino capitalism" of the last decade, must be dismantled from the rest of the global economic activity so that it can find a way back to more traditional expansion dynamics.
A part of this cleansing is the discarding of the high leverage behavior and ever upward view of economic indicators. I think that future historians will view the period of 1982-2008 as a time when this "casino capitalism" took the world off course and separated intelligent, prudent, morally based rules from economic behavior. The overarching feeling of thinking "we could have it all" led us into the wall of what has become the Great Recession. This realization is now part of the growing post mortem on the global economic meltdown we have been experiencing for the past 9 months.
The second dynamic is reorganization. This has not been discussed, and may not be for a while by economists and media talking heads. As I write in the next column of this newsletter, humanity is in transition between two ages. We are moving into the global stage of human social, cultural and economic evolution. This means that there must be a reorganization of almost everything that is part of society and how humanity operates within society. This reorganization will happen to economic institutions, political and philosophical allegiances, geopolitical alliances, media and communications; all to a new global order that is getting ever more electronically connected. This will be on-going and must occur.
The reorganization will be front and center in 2010 and 2011 as the full realization of global financial interconnectedness sinks in. The first stage of recovery is what we are now living through, stimulus packages, housing and automotive subsidies and loan guarantees on a nation by nation basis. There will be reorganization of nation state economies at this time. The next step will be the reorganization necessary to embrace the direction the world is headed which is to a more integrated global economy. That will be the business of the next 24 months.
Finally, why do I put the slash in "The Great Recession of 2008-2010/11"? It is first, the extreme variable of how well the U.S. government efficiently, intelligently and quickly injects the stimulus money into the national economy. If it is done well and follow up additional funds are granted if needed, then the downturn will end in 2010. It is second, how the countries of the EU fare with their much more limited stimulus viewpoint. If they are correct that they need less stimulus funds than the U.S., then we will globally emerge in 2010. If they are wrong then the recovery for them will not occur until 2011. Finally, how do Japan and China hold the global view rather than an overly nationalistic view? If they are collaborative with the rest of the world we will emerge in 2010. If not then the global economic malaise will last into 2011.
The other two columns in this newsletter deal with the historical and psychological perspectives of this once in a lifetime economic meltdown.
Those of you who have been regular readers of my blog or have heard me speak in the past six months know that I hold a futurist point of view that is distinct from what the talking heads are saying on television. The posed questions as to whether what we are going through is like 1929 or 1982 or 1987 all miss the point. How the current situation compares to the Great Depression might be interesting intellectual discourse but ultimately leads nowhere. Those financial crises were then and it is pointless to try to equate what is now going on to any one of these downturns.
We are in a time of transition between two ages, the Information Age and the Shift Age. Any transition between two ages creates great disruption as the "old order" gives way to the "new order". Whenever a new Age begins to take root, it causes new dynamics and forces that we find hard to explain, as the metrics of the past no longer seem to be of significance. The analogy, for those who remember it, is the decade of the 1970s. This decade was very disruptive and things happened, such as the simultaneous rise in employment and inflation, for which we had no precedent and had to therefore come up with new language. The word stagflation was born to explain this economic situation. In addition, most economic indices were sideways for the better part of the decade. Sound familiar?
Well in hindsight we can see that the 1960s was a decade when the U.S. and the developed countries of the world were Industrial Age economies; when the phrase "what is good for GM is good for America"" was true. Then in the 1980s, with the advent of Microsoft, Apple, personal computers, communications satellites and cable television, it was clear that the U.S. and the developed countries of the world were now Information Age economies. That meant that the decade of the 1970s was the transition between these two ages. Another example is the huge losses and great pain of the American Civil War, with the newly industrial North triumphing over the rural South. This initiated the rapid growth of the Industrial Age in America.
We are now going through such a transition between two ages. This transition will last around 6 years and began around 2006.
We are now moving into the Shift Age, which as the name implies, creates shift going on in all aspects of human endeavor. One of the first areas where this shift is clearly and painfully present is in this new economic reorganization into a new global whole. This current debt crisis is a global crisis in its interrelatedness as the paper created by Wall Street is on the balance sheets of financial institutions and sovereign wealth funds around the world. Conversely, the money that is keeping the U.S. government afloat comes from other countries. Money has become electronic, central banks need to coordinate policy, government involvement in the financial and other markets, notably the energy market needs to be completely recast to anticipate this new human global reality.
Whenever there is a new order the early indications are usually exciting. The early indications of the Shift Age come to us because of and through our accelerating electronic connectedness. It is also exciting because of the new touch and voice interfaces with technology. We get excited about how connected we are and how everything seems to be immediately available, all the time. The second stage has now begun, which is the painful stage when what used to be true, no longer seems to be true. When what used to work, no longer seems to and when the filters through which we view the world no longer seem to give us a clear view or ability to analyze and predict. As the great Alvin Toffler once said: "Any serious restructuring of business must directly attackthe organization and the entire system of power based on it." While "attack" might be a strong word, it is clear that the nation state structure of business is now being superseded by an incredibly complex and interrelated new global business structure that we are only now beginning to understand.
In 2025, when historians look back, they will write about how the time between 2005 and 2012 was the time when the new age, the Shift Age began. They will write that this debt related financial crisis we are deeply mired in was just part of the painful transition from the Information Age to the Shift Age. People, and certainly institutions live in and reflect the past. That is why there is pain. When new forces and dynamics take root and create change, people and institutions are surprised.
As a futurist, I spend a lot of time thinking about, looking toward and sensing the future. The analysis of developing patterns and the connectivity of seemingly unrelated events helps me to develop a vision of what lies ahead. I do believe that there is a real possibility of a new golden age of humanity, but there will be painful and confusing transitions until we begin to understand the dawn of this new time. The current financial crisis is one of many events of upheaval that will be part of this inevitable process.
If you are a baby boomer, you were probably raised by parents who lived through the great depression. The scar that it left on them was profound and stayed with them all their lives. It affected how they viewed money, security, savings and lifestyle. As their children we were told of how tough the Great Depression was and what they did to get through it. It was a scar that lasted a lifetime.
In the past six months, Americans, and for that matter hundreds of millions of people around the world have been scarred. All of a sudden our financial world collapsed. Millions of people did what they were supposed to do. They invested in mutual funds, owned real estate, invested in bonds, and diversified their investments. And what happened? Every asset class lost value. In less than a year 401k plans became 201k plans; homes plummeted in value, bonds stopped paying interest. It became quite clear that "playing by the rules" and investing sensibly didn't matter. This has left not only an eviscerated net worth at all levels of society but has left a scar that I feel will last for years and perhaps for a decade or longer.
About seven months ago, when Lehman Brothers declared bankruptcy and the global financial markets collapsed I wrote that "Thrift would become the new extravagance" and that "Thrift would be the new cool". That has certainly occurred. Instead of taking pride in getting a new car to replace the one purchased two years ago, people are talking about how long they have owned their cars and are keeping them as long as they can. The interesting aspect of this new behavior is that it will make people realize that they had been caught up in ever more consumption and acquisition. As I wrote eight months ago in a column on my blog that can be clicked to elsewhere in this newsletter, the third economic wave of the past 40 years has come to an end. The first wave was the ever increasing value of residential real estate. The second wave was the longest equity bull market in history. Both these waves gave consumers a sense of wealth against which they borrowed heavily. When these two waves collapsed in the past two years, it led to the current collapse of the consumer economy.
Fifty years ago, consumer spending represented about 63% of the GNP of the U.S. In recent years that percentage was around 73%. Now, due to the significant contraction of the GNP underway, that percentage may be relatively constant to slightly down. However I forecast that when the economy does start to expand it will not be due to the consumer leading the way as much as it has in the past. The bad news is that getting consumers to spend will not be the easy way out of this recession. The good news is that the savings rate will go up and stay up. It is remarkable that, while the U.S. is undergoing the greatest and most rapid employment contraction in a lifetime that the savings rate in the past 5 months has gone from a minus .5% to a plus 4.5%. When people feel that the only thing they can control is what they spend or save, they will save more. They will be much more deliberate and considered when it comes to spending.
This practice will continue even when the economy comes out of recession. Many baby boomers are realizing that retirement is postponed indefinitely. Many people in the X and Y generations realize that the baby boomers are staying in the work force longer, limiting their chances for promotion. Many millennials are facing economic hardship for the first time. Even the extremely wealthy feel at risk and are in thrift mode. All of this is a scarring that will last for years if not a decade or longer.
The good news about this scarring is that it will not only create savings in the U.S. it will act as a damper on inflation. Six months ago I projected a short term time of deflation, which seems to have occurred. What costs more than it did a year ago? Thrift habits are helping to drive down prices. The consumer is getting conditioned to not buy anything unless it is on sale, and at a significant discount. The general feeling the consumer has is to wait as prices will come down. A self fulfilling prophecy to be sure.
Now it is very clear that, with the incredible amount of money being printed and injected into the economy, there will be inflation ahead. Historically, when this much money is pumped into an economy in recession, the result months and years later is sharp inflation across the board. There will certainly be inflation due to dramatic increases in the price of oil and some commodities that will affect pricing in some sectors. However, in the consumer sector there will be much less demand for goods and services and this will help to keep broad based inflation down due to this lasting scar we all have.
This Great Recession has been a blow to the gut, a scar that will take many years to heal.