Where We Are and Where We Are Going

Last Friday I was lucky enough to be treated to lunch by PIMCO, one of the world's largest mutual fund companies that happens to have their headquarters down the street from my office. I was also fortunate enough to meet Bill Gross, the co-founder and one of the fund manager. Before that a 2012 economic outlook was given by one of PIMCO's economist and analyst. Below is a brief summary of what he had to say:

A brief summary of how we got here:

                The fall of the Berlin Wall in 1989 brought on a new era of economics. This incident opened up nations to the world market that were previously closed off. Furthermore the invention and application of the internet exacerbated this global trend. These new markets meant more resources; resources that were previously untapped. This created a boom in both materials and labor. Large parts of the labor market in developed nations were no longer as competitive and policy makers did not react. This all created a constant flow of capital out of the developed nations.

The question facing us today:

                Will the US be like Japan and face years of austerity, or will there be some policy to turn it around?

The possible options and outcomes:

(best case scenario)

                China can (inflate) have their currency appreciate and leverage themselves upwards, similarly to the US during the 50s, 60s, and 70s. When one’s own currency appreciates, their buying power also increases. This would allow China to become much more consumer based. We can transfer the consumption base from developed nations to emerging nations if US stops their spending and China starts spending. This would bring capital flow back into the US.

(another positive scenario)

                US policy makers might begin to feel the competition and growth of emerging markets are trending unfairly and act to stop this one-sided growth. For instance some action might be taken to further protect intellectual property. Intangible property is much harder to protect beyond borders, but perhaps we can start receiving some of the revenues we “deserve” i.e. from movies, music, etc.

(negative outcome)

                Europe’s debt is greater than their income, as is the US, and if we won’t be able to pay off the debt in a controlled matter with our own currency we could continue to follow Japan’s footsteps. (Japan kept interest rates at near zero in attempt to stop deflation and began to subsidize failing banks that virtually became “zombie businesses” and investments continued to be directed outside the country as manufacturing firms became less competitive to markets overseas…sound familiar?)

Where our economy goes depends more on Europe, China, and our own policymakers than it does our very own businesses.