Ten years ago this November, the 18th Central Committee of China’s Communist Party held its quinquennial Third Plenum.  The meeting decided on a set of reforms that were well-chosen to sustain the national growth rate.  But the reforms have not been implemented, contributing to a big slowdown in the economy.

1. The decline in Chinese growth

As of ten years ago, 2013, a naive extrapolation of the differential in growth rates between China and the US suggested that the number two economy would overtake the number one economy by 2021 (when GDPs are compared using nominal exchange rates). Some even said the cross-over year would be 2019. This did not happen; the US economy remains far ahead.  Goldman Sachs and others now project that China’s GDP will not catch up with US GDP until 2035, if ever.  Even if the crossover occurs, it may be only temporary.  The Chinese economy is forecast to peak sometime in the middle of the century, after which the ongoing decline in the labor force will outweigh productivity growth.  This drastic revision of crossover forecasts is one indication of how sharply trend growth in the Middle Kingdom has been revised downward since 2013.

Naomi Klein has a new book, Doppleganger: A Trip into the Mirror World.  It could offer some sorely needed insights into the bizarre tangle of political polarization, contested realities, and viral digital communication in which we find ourselves in the 21st century — the improbable dream from which we are evidently not going to wake up.  The insights include a recognition that the far left and far right have some things in common and a candid critique of the personal brand that she had developed in her own past writings.

What a difference a year makes!  In 2021, interest rates were close to zero in the US and the UK,  and slightly negative in the eurozone and Japan.  They were expected to remain low indefinitely.  Remarkably, as recently as January 2022, investors thought that the probability the interest rate would rise above 4.0 % within 5 years was only 12% in the US, 4 % for the euro-zone, and 7 % for the UK [p.45].  Those were short-term nominal interest rates.  Correcting for expected inflation, real interest rates were substantially negative and expected to remain so.

A skydiver jumps out of an airplane, apparently without a working parachute. On the way down, a passing hang-glider calls out to ask how he is doing.  The plummeting man shouts back “Okay, so far!”

For many, the US economy resembles the skydiver.  But they are probably wrong.

1. Expectations of a hard landing

Many think a hard landing became inevitable when the Fed in March 2022 began a series of interest rate hikes, which totals 5.0 percentage points so far and is expected to continue. Many economists, as well as the public, have been confidently predicting a recession for over a year now, or even saying that it has already begun.  In June 2022, 57% of respondents told pollsters that they believed the US was already in recession, versus only 21% who did not.  An inverted yield curve in bond markets suggests that the financial sector, too, has been expecting a downturn.  The word “recession” appeared far more often in public media during the last year than is usual even in the midst of a true recession.

After an interval when little attention was paid to the long-run prognosis for government debt, its sustainability is again front-and-center in the United States, as in many other countries.  The reason is not the concocted debt ceiling crisis, which was resolved at the end of May, two days before a looming default. A likely reason is, rather, the big increase in interest rates over the last year.

So long as interest rates, both nominal and real, were historically low — even close to zero in 2021 — it seemed fine for the government to borrow.  In particular, short-term real interest rates, that is, nominal interest rates minus expected inflation, were negative.  But now that interest payments on the national debt have risen, with more to come, the situation doesn’t look so benign.

A two-decade drought in the western United States, the worst in more than 1,000 years, has pushed chronic water shortages to a critical point, notwithstanding above-average precipitation this past winter.  Similar water shortages afflict Europe and some parts of Africa, Asia, Australia, and Latin America.

Forty million people in western US states get much of their water from the Colorado River. On May 22, their representatives reached a supposedly historic agreement to solve their conflicting claims for the time being.  California, Arizona and Nevada managed to negotiate how to allocate reductions of 14% by 2026, in water drawn from the river.

An estimated 61 countries are currently in debt distress or at risk of it, which is almost one third of the membership of the IMF [32% of 190].  The G20’s Common Framework for Debt Treatment is supposed to facilitate debt restructuring for low-income countries.  But it has made only slow progress.

Many of these countries are in Africa.  Chad restructured its debt in 2021, the first to do so under the Common Framework. Zambia defaulted on its foreign debt in 2020, but has so far been unsuccessful in getting its creditors to agree on how to restructure its debt.  Reluctance of China to participate with other creditors in the traditional Paris Club process is a particular problem in the Zambian case.  Ghana, which defaulted on its external debt in December 2022, has apparently been better able to move forward with restructuring.  Rescheduling of the terms of Ethiopia’s debt was delayed by civil war, but may move forward now.  Angola received 3-year debt relief in September 2020, but remains in trouble.

This month marks the 50th anniversary of the date, in March 1973, when the dollar, yen, deutschemark, pound, and other major currencies went untethered, their relative values to be determined thenceforth by foreign exchange markets rather than by governments.  The abandonment of the Bretton Woods system of fixed exchange rates was generally viewed as a policy failure. The movement from fixed to flexible exchange rates, however, was better viewed as part of a natural long-term process.

The popular ESG movement advocates judging firms, not just by what they generate for shareholders in short-term profits, but by their emphasis on environmental, social, and governance goals.  The movement has its detractors, particularly in the United States.  A counter-movement is gathering steam. It would prohibit some financial institutions from investing in firms that follow ESG practices.

To be sure, ESG does warrant some skepticism.  Often, corporate commitments are essentially mere exercises in public relations.  But those who, in the name of economic freedom, would ban private investors from pursuing ESG goals are logically confused.

The US federal debt hit its legal limit, $31.4 trillion, on Thursday, January 19, 2023.  Everyone feels that they have seen this movie before: there is no need for alarm because the politicians will strike a deal at the last moment.  But this time, the movie could well end tragically, as a result of the intransigence of Republicans in Congress.  It is likely that they will refuse to raise the debt ceiling until after they have driven the car over the cliff.  This could mean a once unthinkable default by the US government.  Unfortunately, letting them do that may be the best strategy available to President Joe Biden when the time comes.