While the global debt reckoning is upon us, there is no need to fear, if you gain some historical perspective, says John Mauldin of Thoughts from the Frontline.
Two thousand and twelve will be the year that the consequences of the choices made by nations of the so-called developed world will begin to truly manifest themselves in the economic realm.
We are in the closing chapters of the current Debt Supercycle, with different countries strewn out along the path, some at more advanced stages than others…but all headed for a destination that will force major decisions if politically painful actions are not taken. The longer that process takes, the fewer options that are available and the more painful the outcomes.
Some countries (think Greece, et al.) have a choice between dire economic circumstances, and disastrous. The option for merely difficult choices was passed long ago, and the rules are such that there is no going back to where you started without a different but equally painful outcome.
This is the time of year I think about the future, and foolishly opt to make predictions. This year I have decided to be especially foolish and to think about the next five years, especially for the US.
Why five? Because I think by then the consequences of our past and immediate future choices will have been realized, the "reset button" as it were will have been pushed, and the economies of the developed world will be ready to move on to a brighter future.
The question is, from what level will that new upward journey begin? It will be very different for different countries, depending on the paths they choose.
Let me presage my thoughts. Most countries are being faced with dual choices, which differ according to their own particulars, but all deal with what to do about the need to deleverage, both in the public and private sectors. The end of the Debt Supercycle is a tectonic plate shift of massive global economic proportions, unlike anything the world has seen for 70 or 80 years. It will cause all sorts of economic earthquakes, tsunamis, and volcanoes.
While the choices each country makes are their own, the consequences of their choices will have a much larger effect upon the world, as global interconnectedness has landed us in a world where isolating the impact of a problematic country is no longer possible. The need for global cooperation is most paramount at a time when politicians will be more and more restrained by the exigencies of their local problems and voter angst.
Jumping ahead and, by way of example, taking a peek at the Greek newspapers, one would not think that the current Greek crisis is at root a problem of their own making. The culprits are those nasty Germans. Political cartoons depict Germans as saying they have finally won WWII. Not exactly the climate in which Greek politicians are able to make calm decisions or explain the need to accept a great deal of pain.
And the German editorials and columns are awash with the question of why Germans should work longer and harder to pay for Greek retirements and "lavish" benefits while Greeks don’t pay their own taxes.
But choices must be made to proactively deal with the problems, or have the market force a severe solution. It is not a choice between pain or no pain, but exactly which pain do we prefer and how much? And anesthetics are not available on the pain menu.
This is pain that will be felt from head to toe of the various national economic bodies, worldwide. The US, Europe (including most of Eastern Europe), Japan (a bug which will soon find that windshield!), and even (especially) China must all deal with the problems that come with deleveraging.
To fully understand the nature of the choices and their consequences, we are going to start somewhat far afield with some thoughts about choices and path dependence, then look back at history to see if we can get some clues about what deleveraging looks like (warning: it is not pretty), then examine the choices faced by specific countries and make some guesses as to outcomes, where possible.
I should note that in spite of the rather dark tone, I remain an unabashed long-term optimist. History shows that these periods end and new periods of growth and prosperity emerge. While for the moment the situation is stressful, the trick for individuals is to make the best possible choices, given the circumstances, with a view to that moment in the future when risk will once again be something to be wooed and willingly accepted, rather than avoided as much as possible.
For nations, it is preferable to make the choices that will bring about a new equilibrium, even if doing so requires some pain. The longer that difficult choices are avoided, the greater the pain will be when the choices are either taken or forced upon us.
That being said, so many choices are made by people and nations who happily blunder forward into what proves to be a disaster, swept along by the tides of emotion and rationalization, thinking that by avoiding the consequences of the real problems, things will somehow turn out OK.
I am reminded of the times when I told my children to clean their rooms before they went out to play, and was cheerfully told, "I did," as they poured out the door, only to have Dad find that they’d stuffed all the detritus that was on their floors into the closets, drawers, and under the bed. The appearance is that there is order and calm, while in the shadows and cubbyholes lurks the sad reality.
To be able to make wise choices means understanding and dealing with the real problems and not just the symptoms. In the US, the old joke was that doctors routinely told their patients to "Take two aspirin and see me in the morning" (which simply shows that I am old enough to remember an era when everyone had their doctor’s home phone). And that was often the best advice, as most things do eventually take care of themselves, one way or another.
But if you are lying in a ditch bleeding on the side of the road, you need more than aspirin. The European interbank credit markets are screaming that the system is at risk of a cataclysmic failure. Think Bear Stearns and Lehman. On steroids.
We are rapidly coming to the point where we can no longer stuff the dirty clothes and toys under the bed. There is no more room. We are going to be forced to actually deal with the mess.
That means that we will have to put "playtime" off for a little bit, but Market is going to stand over us and force us to clean the room. Better to get on with it.
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