January 05, 2013
Mark Minchin

How will the Developed World Heal Itself?

We all know by now that the financial crisis that erupted in 2007 and the sovereign debt crisis that followed were the result of the developed world borrowing from the future to fund its current consumption. Essentially borrowing went on for far too long, and has resulted in a monumental debt burden which will have to be borne by the next generation.

So what does the World have to do to fix its economic woes?

I recently read a sobering paper written by Daniel Stelter of Boston Consulting Group. It is well worth the time if you have twenty minutes (click here to read it).

The article covers in detail some of the deeply troubling debt and demographic challenges facing countries in the western world.

I would however caution readers not to get overly pessimistic while digesting what are undeniably deeply troubling numbers illustrated in Daniel’s paper.

What the paper doesn’t mention is that the financial crisis has largely been a Western World phenomenon. The debt and demographic problems which exist in the developed World are conspicuously absent in the emerging world. Moreover, since the crisis began in 2007 no major banks in Asia, Africa, or South America were rescued or nationalised. It is also worth remembering that 90% of the World’s population reside in the emerging world which collectively is enjoying annual economic growth of around 5%.

I make these points because whilst the challenges in the West are enormous, as each year passes these problems become slightly less relevant to the World economy as a whole. Nevertheless, as it stands today Europe and the US remain the World’s largest economies.

In summary, Daniel’s paper suggests that the following will need to take place if the World’s financial issues are to be properly addressed:

Leaders from all social sectors – government, business, organised labour, environmental and other stakeholder groups will have to make considerable sacrifices.

  • Creditors will have to accept losses.
  • The wealthy will have to pay more taxes.
  • Wage earners will have to work longer and save more for their retirement.
  • Public spending on social welfare will have to be cut, even as spending in new areas of social investment will have to be increased.
  • Governments will have to get smaller and more efficient.
  • And because these problems don’t affect the developed economies alone, but also global growth, the emerging economies will have to contribute to the solution by consuming more and exporting less.

What will the markets do this year?

The ever optimistic Morgan Stanley team suggest the ASX 200 Index will go to 5750 (today we’re at around 4800) by June next year, while JP Morgan are more “glass half empty” with a forecast of 4600 by December. But interestingly, of all the investment banks, only JP Morgan expect [Read More]

July 24, 2013