October 4th, 2009


A "new normal" for the world economy

After the storm (The Economist)

I would have commented on this, but one of the earliest reader comments pretty much hit the nail:
"The new normal" presumes that what preceded the crash was "normal". It wasn't. It was a bubble.

This is not just an academic point. We cannot expect growth rates (or, perhaps, even employment) to return to what they were during the bubble. Growth rates are unsustainably high during a bubble. The best we can expect is to return to non-bubble growth rates; seeking rates higher than that will push us toward a new bubble.

Let me add that the bubble did not start just recently. We have had a succession of bubbles all this century and the last few year of the previous. But in the meantime, the world has changed. Most notably, several developing nations are in a position to give better return on investment than the US, Europe and Japan. Because they need the money for investment, while we mostly crave it for luxuries. It is pretty obvious which will give the best return. We faked this for a long time by selling houses to each other at ever higher prices, but that fake return on investment will come to an end. And when it becomes obvious that much of the "economic activity" in the West is just spending more than we earn, people will start looking elsewhere to invest their money.