Last Friday the World Trade Organization dropped it estimates for global trade growth. For 2012, the estimate was dropped to 2.5 percent from 3.7 percent. For 2012, the estimate was reduced to 4.5 percent from 5.6 percent. Christine Lagarde, managing director of the International Monetary Fund, announced on Monday that the IMF was in the process of reducing economic growth estimates for the world.
The IMF was already under the WTO projections in its July forecast. The IMF was estimating that 2012 growth would be 3.5 percent and 2013 growth would be 3.9 percent. The global economy grew at about 4.0 percent in 2011.
Europe is in a mess and there is little or nothing that can be called leadership in the eurozone. The southern periphery is doing poorly, and Germany, the economically strongest of the European countries, is expected to announce data on Wednesday that will confirm a weakening economy.
Spain has been dragging its feet relative to the rest of the EU in terms of requesting funds to support its economy. A large number of its banks are insolvent. The national government faces rebellion amongst its member regional states. Greece remains a disaster area and so on and so forth.
China continues to struggle, as does India. Brazil, although it is not doing all that great at the present time, makes most of the other South American countries look desperate. There seems to be very little pointing up!
And, the leader of the free world? The United States in 2011 grew, year-over-year, at a 2.0 percent rate. The second quarter of 2012 is 2.3 percent above the second quarter of 2011.
Furthermore, there is no leadership coming from Washington, D. C., and the government faces the so-called "fiscal cliff" following the election. The one word that seems to capture the mood in the country is "uncertainty": Uncertainty of economic policy; uncertainty of regulation; uncertainty of economic health; uncertainty of who is in charge; uncertainty of legislation; uncertainty.
Stock markets seem to be pausing as investors consider the situation. The only ones seeming to be trying to provide any kind of leadership in the world are the central bankers and their answer is to provide more and more liquidity to the markets in hopes some of it will go into productive enterprise. But this doesn't seem to be happening as manufacturing indices, growth in industrial production, and estimates of capacity utilization all continue to fall.
In addition, the earnings of corporations around the world seem to be slumping. In fact, just this kind of information seemed to be the justification given by Federal Reserve Chairman Ben Bernanke for the Fed's new round of quantitative easing. One of the arguments surrounding all of this turmoil is about the nature of the slumping economic growth.
Mr. Bernanke, for one, has recently argued that the problems we are going through are just cyclical in nature. Therefore, good old economic stimulus is all that is necessary for economic growth to pick up and unemployment to drop.
Others, myself included, argue that one reason that economic growth is so modest and that much of the economic stimulus that is being applied to the various economies is having so little impact is that these economies have a major amount of re-structuring to do before more normal economic growth can be achieved.
In the United States, we have under-employment of about one in five people of employment age. The rate of labor participation has receded to a level last seen in the latter part of the 1960s. A lot of the manufacturing capacity is out-of-date and needs to be modernized.
Our education system seems to be lagging as American students, on average, are falling farther and farther below what others in the world are achieving. The American society seems to be bifurcating along many different lines: computer literacy and accessibility; education, class, location, industry, parental situation, and so on and so forth.
If the "structuralists" are correct, the next 5-10 years are going to produce slower than expected economic growth as the economy tends to work itself through the dislocations that now exist. Large amounts of stimulus are now going to help the adjustment because aggregate economic policies like monetary stimulus just work to put people back in their old positions without resolving the issues of a misallocation of resources.
And, I believe, that this structural problem exists in Europe and elsewhere in the world. I certainly saw a massive amount of structural problems in my trip to Italy this spring. Much has to be overcome worldwide.
Mis-reading this situation is akin to the situation that existed in the early efforts to combat the financial collapse. Many people, including Mr. Bernanke, read the situation as one of liquidity. The solution to this problem was to throw massive amounts of liquidity into the financial system to allow markets and assets to become more liquid.
The problem, however, was that the problem was one of solvency and this problem could not be overcome by just throwing lots and lots of money at it.
The fact is, many people still feel the problems we are going through are ones of liquidity and not solvency. This is true especially in Europe and the situation cannot be resolved until attitudes change.
World economic growth is slowing. People around the world have been overly optimistic about global economic recovery because they pictured the situation as a "normal" business cycle.
I believe that the period we are going through is one of transition similar to what occurred in the 1930s. The world has changed over the last 50 years and now people and nations need to catch up with the technology. In the 1930s we went from an agricultural world to an industrial world. In the 2010s we are going from an industrial world to a world dominated by information technology.
The transition cannot be accomplished over night. Thus, we need to accept the fact that economic growth may be slower than what was achieved over the past 50 years. We need to accept that people need to be educated differently. We need to accept the fact that many things are changing from what we know to something different. But, these things need to happen!