With the 21st Century almost a fifth over, the outlook for the 22nd is beginning to become clearer. The range of uncertainty is still very high, but based on current political, technological and demographic realities, we can start to make some predictions. Whereas at the turn of the 21st Century those predictions would have been generally optimistic, as was everybody at that time, they are now pretty gloomy. Indeed, the one factor that in the next century does not appear likely to make our lives significantly more miserable is global warming.
The biggest fresh factor which has loomed up in the last two decades and is likely to make our grandchildren’s lives more miserable is global irresponsibility on state spending and budget deficits. In the last years of the 20th Century, the United States was running a budget surplus, while Britain’s state spending was well below the levels of two decades previously in terms of GDP, constrained by a self-denying agreement by Tony Blair’s government. Since inflation was also well down on the previous decade while democracy was advancing everywhere, with even “Third World” governments seeing the virtue of budgetary stringency, fiscal policy appeared to be a problem for which we had found a long-term solution. Only in Japan were budget deficits worryingly high, owing to that country’s prolonged 1990s recession, and even there it appeared that a few years of self-discipline would set matters straight.
Alas, the last two decades have seen a total global breakdown in responsible budgetary management. The United States was the first to backslide, with the loathsome team of George W. Bush and House Speaker Dennis Hastert allowing fiscal discipline to collapse, spraying pork-barrel money around to get approval for Bush’s disastrous “War on Terror.” Then the financial crisis of 2008 was met with further gross fiscal irresponsibility, both by the outgoing Bush administration and the incoming Obama administration, with its feckless trillion-dollar deficits and Ben Bernanke’s disgraceful “funny-money” policies that caused debt to spiral while productivity growth slowed to zero on a crazed run-up in asset prices. Now President Trump has indulged his New York spendthrift instincts on fiscal policy and is trying to force the Fed into indulging his real-estate developer instincts on monetary policy.
It is not, however as if policy has been any better anywhere else, except in Germany. Britain blew out its budget in 2007-10, then followed the world’s feeblest “austerity” policy before blowing it out again – the true size of the budgetary hole has been disguised by interest rate policies even worse than in the U.S. Japan has allowed its public debt to soar to 250% of GDP, the highest level ever successfully dealt with – and there is no sign of Japan taking the steps to deal with it. All over the world, therefore debt ratios are rising uncontrollably, with no political will to rein them in.
This column has pointed out several times the advantages of a hereditary Second Chamber of the legislature, so that politicians’ usual 3-4 year time horizons can be overcome and attention can be focused on longer-term threats to global prosperity. The current budgetary insanities are exactly the kind of issue that could be reined in by such a Second Chamber, aware as it would be that on a 25-year view, not even a 100-year view, disaster must occur. As it is, the only long-term issue that crosses the radar screens of politicians is global warming. There the modest potential rise in temperatures a century hence is not the real issue that excites them; it is the chance for control-freak leftists to seize the commanding heights of our economy and drown us in taxes, regulations and boondoggle eco-projects.
You can do the arithmetic yourself. The U.S. budget deficit is currently about 5% of GDP and rising. Say it averages 6% of GDP over the next quarter-century, while interest rates remain low (so there is no significant compounding of deficits through paying interest on interest.) Then the Federal debt, currently 106% of GDP, will pass 250% of GDP, the highest level from which non-default is possible, 24 years from now, in 2043. Since the debt of other countries is on a similar trajectory (except Germany, which has little debt, and Japan, which is on a much more severe one) we can expect a global default sometime in the 2040s. A big global recession, almost certain some time between now and 2040, would pull the default date a few years further forward, but otherwise make little difference to the trajectory.
It is difficult to imagine the damage a global default may do, since some countries, such as Britain, have not suffered a default on government debt since 1672. Still, there are some realities we can envision. It will become very difficult for countries to borrow money so national budgets will be forcibly brought back into balance. Equally, the global stock of capital will have been drastically reduced, but in an unequal fashion. Equity markets will have been devastated but will suffer less than other asset classes. Debt will have become virtually worthless, except for the very high-quality debt of top corporations, if there is any of that left by then. Real estate will be devastated more than equities, because its value depends on the ability to leverage it, and there will be no more leverage. Banks and other financial institutions will disappear, because their balance sheets will have been devastated and there will be no government funds available to bail them out.
For individuals, the young and productive will be least affected; their services will remain of value to somebody, so even if they lose their jobs, they will find other employment. On the other hand, older people, who depend either on savings or on their social security entitlements, will be worst hurt –savings vehicles will have vaporized and social security pay-outs will be reduced to whatever is affordable from new premiums. It will be more fun being 30 in 2045 than being 50, and much more fun being 50 than being 70. Being dead, my probable position by then, will be the best alternative of all.
The post-2045 economy will be very different from that of today, and considerably poorer. Much of the world’s capital stock will have been vaporized, and unemployment will initially be extremely high in most countries. The surplus populations of the old and destitute, all of whom will have votes, will together with the unemployed pull political life leftwards, as it did in the United States in the 1930s, with endless schemes of “social credit” and “universal basic income” encouraging governments to tax the few productive incomes and businesses even further.
Of course, if innovation and productivity growth continue at 20th Century levels, none of this will matter by 2100, assuming the world adopts sounder fiscal policies after 2045. With 2% productivity growth annually, the economy’s full-capacity output per capita doubles every 35 years, so in 2100 we could expect to be more than four times richer than we are today. All debt and allocation problems could be solved by such a trend.
There are however reasons to believe that the benign productivity trend of the 20th Century will not repeat itself in the 21st. First, there is the theory postulated by Robert Gordon in his 2016 work “The Rise and Fall of American Growth.” In that book, he proclaimed that the great advances of the first three phases of the Industrial Revolution were ended, and that there was no sign of a fourth phase. At that time, I scoffed at his theory, and suggested that the appalling productivity growth of the previous few years was due to the idiotic policies of the Obama administration and the Bernanke/Yellen Fed – a combination of over-regulation and artificially low interest rates was causing a huge misallocation of capital. The first two years of President Trump have indeed rectified the productivity malaise in the U.S., suggesting that my analysis was correct.
Nevertheless, the forces of regulation, the overspending in the public sector and the continued tendency to force interest rates below their natural level (which would currently be about 4%) suggest that productivity growth may not stay healthy. An ever-growing public sector, a tendency on the part of bureaucrats to regulate first and think afterwards and a refusal to allow market forces to work properly could all prevent the free-market system and technological growth to work their normal wonders.
In addition, there is the corruption of America’s and the world’s university system; if those universities are more interested in inculcating political correctness and fail to direct their young minds towards productive research, then productive research will not happen. I have to think that the quirky and acerbic Isaac Newton would have difficulty making it through a modern college; if he had been left solely to his own intellectual devices he might well have wasted his life on alchemy and astrology.
Without productivity growth, with a financial crisis in the 2040s doing enormous damage to our living standards as well as the small business sector and with regulatory and irrational forces growing all the time, I cannot how see how the 22nd Century can be anything but a miserable one, with wealth declining, knowledge stagnating and out-of-control global population overwhelming resources. Only a total reversal of policies in the rich world will reverse this trend, and I see no sign of such a reversal.
I shall return to this topic in due course, when I have given it more thought – there is after all 100 years of squalor and decline to be accounted for!
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)