During a recent Bloomberg interview PIMCO's Mohammed El-Erian declared, "U.S. economic conditions are terrifying." The boys at PIMCO have been saying this for some time now. They believe that western economies have fundamentally changed and are now saddled with conditions they have labeled: "The New Normal".
Simply put, the new normal is shorthand for a new era of depressed GDP growth and as a consequence, lower returns on stocks and bonds. They say that the new normal is due to a "structural" change in our economy.
El-Erian describes this structural change in an interview with NPR.
"The world of yesterday was a world with tidy categories. On the one hand you had industrial countries, advanced economies. On the other hand emerging economies. The first were the core of the system, they held the system together. The second, emerging economies, were at the periphery and tended to be crisis prone."
He goes on, "The shift has continued this year, as industrial countries like Greece, Spain, Italy, and Portugal have found themselves in the kind of dicey debt situation traditionally associated with developing countries."
In the new normal, El-Erian says, "The traditional major players like the US, and Germany will have less influence. And the likes of India, China, and Brazil will have more."
Financial historian and author Russell Napier has also warned of this fundamental shift in the world economy and describes it this way:
"Strange as it may seem, 2008 will not go down in history as the year of the financial crisis but rather as a time when something much more important happened. It was in 2008 that 40% of the world's population (China, India, and the former Eastern bloc countries) realized that it could not continue to get rich by selling to 14% of the world's population (Europe and the USA)."
Economic data and plenty of anecdotal evidence certainly support the new normal theory. Unlike typical V-shaped rebounds from recessions the U.S. seems to be mired with anemic growth and high unemployment.
Something certainly feels different.
Further strengthening the new normal theory is a colossal shift in demographics -- a record number of people are coming into their earning years in emerging markets at the same time the baby boomers are starting to retire in the developed world. As a result the world is in the midst of a massive shift in demand from the developed world to emerging markets.
Ultimately the new normal means a shift in geopolitical power and standard of living from west to east. It means our quality of life and influence have entered a new era of decline. As hedge fund manager Kyle Bass puts it, "We can't expect to import cheap goods without importing cheap wages and a diminished standard of living. We can't just import the good and leave the bad behind".
Just as Greece has a non-competitive work force as compared to the rest of the eurozone, America has a non-competitive workforce as compared to the emerging economies -- this puts pressure on wages and employment.
Which might be fine -- America has a history of exporting lower-end jobs while innovating new and higher-quality jobs domestically. Critically, this requires an innovative population -- something that again, our demographics portend an impediment going forward. People are most innovative between ages 20 and 26, an age group in inexorable decline in developed economies and rising in emerging economies.
Not only does innovation require the creative capacity of young minds but also the necessary infrastructure. Historically this critical infrastructure has been the purview of developed economies and the physical scientific knowledge derived from it has driven innovation - The USA being the envy of the world in this regard. Regrettably, even this is changing. Never before shying away from the go-it-alone attitude that put a man on the moon, Congress is currently balking at the price tag for a cutting-edge particle physics project called Project X. It now appears, however, that the project may have a savior as India, wanting to get in on the fundamental-physics game, has offered "a substantial commitment" to the endeavor.
Do we realize how truly defeating it would be if other nations were to pass us in the realm of science? GMO's investment guru and great-contemporary thinker, Jeremy Grantham addressed this shift in his just released quarterly letter, writing in regard to climate change and resource depletion in general.
"It would certainly help if the general public were better educated, especially in science. The same applies, unfortunately, to Congress itself. This body is desperately short of scientists and basic familiarity with things scientific. Our key problems need to be addressed by people very familiar and comfortable with science. It is said that eight of the nine senior leaders in China's government are scientists. At that high a level, of our 535 Congressmen and the President and Vice President, less than a handful - arguably only two or three - would pass the test. (I suppose you could throw in the Supreme Court Justices if you wanted to.) It is said, on the other hand, that about 100 Congressmen do not believe in evolution. Without a respect for science in Congress and with science in the general public declining as an interest, some of the painful new issues are going to be hard to address. (The percentage of students graduating with degrees in science as a proportion of total U.S. graduates is the 60th highest by country these days!)."
"The tough news we must sooner or later grasp is made tougher by the skilled, energetic denials, well-funded by powerful industries that fear their profits would be threatened. Libertarians seem to feel that even if the bad news were true, the necessary regulations would be so distasteful that they would really prefer that the science were different, and they deem it so, putting desired political theory over science. Meanwhile, China gets on with it and science is accepted in what used to be our normal way until the last decade or two . And I suppose they have some unfair advantages, among them leaders with scientific backgrounds and higher science scores for the general public, but they also have the luxury of a leadership that does not face election campaigns. Lucky them. The critical consequences are that they waste no time in challenging climate problems (the same is true of India) and, even more importantly perhaps, they begin to really worry, almost panic, about their long-term access to crucial resources. In contrast to our political log jam and failure to face long-term issues, they have moved rapidly to exploit new sustainable energy sources, to tie down resource deals, and to promote improved resource efficiency."
Then the other morning I read this headline: "Santorum Says He Doesn't Believe in the Separation of Church and State."... And suddenly the new normal seemed real. Is it really possible that America would leap back 1000's of years and go down in history as another failed theocratic regime -- as the world's emerging economies leap-frog past us embracing the evidenced-based thinking that, for a brief time, made America great?
Politics aside, maybe the bigger component of the new normal is money - that is; who has it and who owes it. Of course it has always been true that the ones writing the check dictate the terms -- look at Greece as it is being smacked around like a piñata by German creditors -- with the Germans dictating the economic operations of the Greek government, even going as far as "occupying" Greece with German tax collectors (something tells me they will be more efficient tax collectors). And with emerging economies stuffed with trillions in forex reserves while developed economies reach a level of peace-time debt never before attained in history, the "terms" are sure to change. The following exurbs are from the blog zero hedge:
"Rumors of the Chinese savior appearing on the horizon goosed financial markets innumerable times. China, out of the goodness of its big heart, would use its $3.2 trillion in foreign exchange reserves to bail out the Eurozone with the stroke of a plastic pen. Turns out, China didn't have a big heart but a list of unpalatable demands-so unpalatable that even a desperate European panhandling delegation sent to Beijing in November turned them down...."
"Ten days ago, another top-level EU begging expedition tried to lure Premier Wen Jiabao into plowing part of China's foreign-exchange trillions into the European bailout fund, a dreadfully convoluted and opaque creature that they passed off as a rose. But rather than kick the conniving beggars out, Wen declared soothingly that Europe was an important partner, and that China and the EU would work together to solve the debt crisis-and the delegation left once again empty-handed..."
"Open, cooperative, and forgiving towards China-the new rules that China is imposing on the game. Or perhaps just a re-write of very ancient rules. Those with the money get to set the terms when those who need it are desperate. Remains to be seen if someday the Eurozone will be desperate enough for Chinese money to compromise on the support for its coddled industries."
I bet the dialogue goes something like this: "China will be happy to loan Europe money however, we have an excess of steel that needs to be sold. Let's talk about the tariffs you are thinking of applying to our steel ... and for collateral, well, China has always much admired the Louvre."
To be sure, throughout our brief history, American's have always felt like their place in the world was being challenged. We have always been nervous. First it was our oppressive godparent England, then the Germans, the Germans again, the Soviets and the communist ideology, OPEC, terrorism, and now China and the emerging world. Maybe, the new normal is just the next manifestation of our perpetual state of anxiety, that ironically, keeps us alert, motivated, and ultimately compels us to make the adjustments necessary to keep our place in the world as the most innovative and democratic society the planet has ever known.