Recovery and Revolution

I remember some commentators warning about what could happen in August 2013.  Recent economic history has painted August as a month when things can get pretty shaky.  Fortunately, this year the reports in the media this month, suggest that the opposite seems to be happening.  An article in this week’s Economist notes that Eurozone GDP rose by an annualized 1.1% in Q2.  Britain’s recovery continues and in the US, GDP grew faster in Q2 than the initial 1.7% estimate.  In the Pacific, China’s economic indicators continue to be positive and Japan Q2 GDP growth came in at 2.6%.

There are three aspects of the recovery that I want to call attention to.  Firstly, there is the rise in inequality in certain nations.  Secondly, there is the danger posed by more economic bubbles.  Thirdly, there is the role of the United States in the global economy.

Firstly, it is hard to ignore that this recovery has a dark side.  As I have commented on many times before, income inequality is on the rise in much of the ‘West’.  An August 15th article in the FT reminds us that the income share of the top 1% has roughly doubled in the US since the early 1970s, and is now about 20%.   Much the same trend can be seen in Australia, Canada and the UK – although in each case the income share of the top 1%. In France, Germany and Japan there seems to be no such trend.  Seeing how pronounced this appears to be in Anglo-Saxon countries, it’s hard to ignore the cultural as opposed to the economic component.  I am convinced that this is one of the biggest challenges facing decision makers in the ‘West’ today.

An expert on intergenerational income mobility remarked that the painful truth is that in the most unequal developed nations – the UK and the US – the intergenerational transmission of income is stronger.  While in more equal societies such as Denmark, the tendency of privilege to breed privilege is much lower.  So the more unequal our societies become, the more we all become prisoners of that inequality.  The well-off feel that they must strain to prevent their children from slipping down the income ladder.  The poor see the best schools, colleges, even art clubs and ballet classes, disappearing behind a wall of fees or unaffordable housing. 

Secondly, in the US and the UK in particular, it is hard to ignore the way government policy is encouraging bubbles in parts of the property and other asset markets.  To be fair, policy makers are aware of it but now appear to be victims of their own policy.  When Bernanke even mentioned pulling back his $85 million per month in QE, the markets dipped.  Here in the UK, Mark Carney’s “forward guidance” assured us of low interest rates and promises more QE if needed. 

Thirdly, while the US continues to be the engine of global economic growth, she is losing the unrivaled dominance she enjoyed in the earlier post WW2 period.  So as Adam Posen pointed out in an August 6th article in the FT, the global system is somewhere between outright conflict and smooth international governance.   Reflecting this diffusion of economic and military dominance, a few major currencies – not just one – are increasingly being used for invoicing and reserve management, and that trend will only continue.USA Tax Singapore

Fortunately, the influence of the innovative US tech giants somewhat compensates for the challenges facing the government which remains largely paralyzed by the partisan divide.  Many believe that we’ve been experiencing technology cycles of roughly 10 year periods and that we’re actually on the brink of a new leap.  So the –
  • 1960s was the age of the main frame. 
  • 1970s was the age of mini computers
  • 1980s was the age of PCs
  • 1990s was the age of desktop internet computing
  • 2000s was about mobile internet computing
  • 2014+ may be about wearable / everywhere computing?

As my sons progress thru school, I watch how the world that they are growing into is already so different from mine.  The key to it all is technology.  Technology is racing ahead and leaving more and more people behind. Gotta keep up!

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