Dr Dan Steinbock had a recent piece in
Eurasia Review regarding predictions for 2023. I find myself being more of an optimist than he, but that could easily be because I have not studied the numbers carefully. Alternatively, he may simply be too pessimistic. Here is a link to the article:
https://www.eurasiareview.com/19122022 ... analysis/
Some points made and my observations:
In early 2022, the US, the Eurozone, the UK and Japan pledged geopolitical loyalty and ignored economic realities while promoting the worst military overstretch in decades. Thanks to the US/NATO-led proxy war against Russia in Ukraine, the costs of the misguided economic policies and geopolitics were predictable already in March.
This is a bit too much of the “it is all NATO’s fault.” As argued in the thread dedicated to analyzing that war, I think it is more of the need to respond to an act of unprovoked aggression on the part of the Russian government. It is not so much an ignoring of “economic realities” as it is an understanding of geopolitical reality. Still, the point that policy positions that flow from that understanding will have economic consequences that will carry over into 2023 is well taken.
In the Eurozone, government debt to GDP remains close to 100%. Ironically, that’s 40 percentage points higher than the region’s own debt limit. In the UK, the figure has doubled since 2008 to almost 100%. In Japan, the figure is the worst among all high-income economies; close to 265%, thanks to over two decades of secular stagnation.
In the US, the debt ratio has doubled and is inching toward 140%. That’s over 20 percentage points higher than that of Italy amid Rome’s 2010 debt spiral. But unlike Italy (and its bygone lira), America is a global anchor economy and US dollar still dominates international transactions. So, when the US debt crisis ensues, adverse reverberations will be felt from the world economy to global foreign-exchange markets.
I am not so sure that we are on the precipice of a debt crisis. There is an awful lot of wealth out there to support high levels of borrowing. Sure, caution should be exercised in going down the route of excessive borrowing, and it is difficult to know whether boundaries are being crossed that may cause significant problems.
I like to use the analogy of an individual household. Such a household may borrow money to purchase a home. One could look at the size of the debt incurred and say OMG they have borrowed an amount that equals
140% of their annual income. Clearly unsustainable. Well, yes and no. One should take into account the benefits of owning that home, especially that of building up equity.
In a similar manner, borrowing can also have benefits. Mainly the extent to which economies are brought to levels of full employment. In such circumstances, the ability to pay off debt can be quite manageable. Meanwhile, infrastructure is being built, needed provisions for common defense are being provided, public health systems are being (often inadequately) maintained, research and development is occurring, manufacturing capacity is being increased, and…well you get the picture.
So why all of the anxiety about the debt?
A couple of somewhat legitimate motivating reasons are:
1. The desire to keep taxes to a minimum.
2. Concerns regarding inflation.
Conservatives are especially concerned about the first point. With huge inequalities of wealth, government policy makers may be tempted to increase taxes upon the rich toward paying off the existing debt and to avoid further deficit spending. Hence the desirability of a relatively low debt ratio.
Government spending can also introduce excessive demand for product and services into the economy. In such cases, inflation can be a result. Inflation can also be thought of as a sort of tax in that the purchasing power of everyone is reduced for everyone, including the rich, the middle class and the poor.
Now, Dr. Steinbock makes the additional point that we may be heading for a recession. This is because central banks are raising interest rates to keep inflation in check. The goal in the U.S. is for a so-called soft landing wherein inflation is reduced to 2% without triggering a recession.
So, what is my opinion as to whether they will achieve that soft landing in 2023?
Well, as wrote earlier, I am optimistic about those things, so I am hopeful that there will either be no recession, or that whatever recession does occur will be relatively mild. I don’t claim to be a very good prognosticator about these sorts of things, so we will see.