Japanese-style stagnation, not economic collapse, is the most likely scenario for the US. Harrisburg, PA and Greece may go down the drain (and maybe even California and New York City and Illinois), but that’s not the end of the world. It’s just the end of them.
10) China’s controlled growth deceleration is doing reasonably well, according to Cantor Fitzgerald’s Asia strategist Uwe Parpart, my old Bank of America colleague.
9) China’s banks may be choking on bad loans, but China’s massive foreign exchange reserves can cover the problem out of petty cash and rounding error.
Southeast Asia continues to grow, with local stock exchanges up about 20% year to date.
7) India is doing well. Add up these first four items and half the world’s population is doing just fine.
6) Europe’s economic problem is less important than it seems because “Europe” is no longer the relevant entity. Germany is decoupling from France and the Club Med countries and shifting its focus to China and Russia.
5) Russia isn’t doing badly, thanks to 12 million foreign workers from Turkey and the Turkic former republics of the Soviet Union which have solved its labor shortage, while...
4) Turkey is doing well exporting labor, construction services, and manufactures to Russia and the Arab world while acting as a hub for Russian oil.
3) Retirees around the world are hard pressed to find investments that yield enough to pay for their retirements, but it’s an ill wind that blows nobody good: the extremely low yields on long-term debt that generate a $3 trillion deficit for US state and local governments also benefit capital-intensive industries. It’s not a wash, but it’s not a washout, either.
2) Irresponsible as US monetary policy may be, there’s no alternative to the dollar, and there will not be for some time (I own a decent amount of gold in various forms in case I’m wrong about that) — so the US can get away with huge deficits for quite some time.
But the number one reason that the world isn’t coming to an end is –
1) Barack Obama! He’s cooked politically. He’s practically a lame duck. Gridlock in Washington will prevent this dreadful administration from doing any more damage. And that’s good news.
That said, it’s not the end of the world — it’s just the end of you, if you’re one of the 6 percent of the US population reaching retirement age during the next ten years, or if you’re a public employee counting on a pension, or run a small business. Life will go on in these United States, drearily. But don’t expect a great cataclysm to put you out of your misery.
The equity risk premium will remain stupidly high for reasons detailed in the link. But there’s no reason for stocks to crash, that is, for the equity risk premium to get even higher than it is now.