The buyer of last resort
We are in the midst of a global economic boom of unprecedented breadth, in part fueled by the BRIC countries’ growth. (BRIC is an acronym Goldman Sachs coined in 2001 to reflect the rising economic power of Brazil, Russia, India, and China.) The last time world growth was this robust, about 40 years ago, world GDP was only $13 trillion; today it is over $36 trillion. It may all go on for years, and things might work out splendidly. We certainly hope so.
However, it is fair to note that a central engine of growth continues to be the US consumer, as the chart above shows. The US GDP is 70% consumption (GDP is roughly consumption, investment and government spending, or alternatively consumption, savings and taxes). So what happens if American consumption goes down because markets fall, or there is a recession, or some credit crunch — it’s all happened before. The following chart may be illustrative:
In future years, the BRIC countries may be able to pick up the slack if the American consumer stops spending. However, that is not the case now. For example, China’s soaring economy is still 70% dependent on exports for its growth, and also depends on huge amounts of FDI to fuel its expansion plans. So, as Hank Paulson said, “It pays to be vigilant.” And this:
We haven’t had a global financial shock since 1998. I believe that these large and dramatic increases in private pools of capital [hedge funds and private equity] and in the credit derivatives markets since then have helped manage and disperse risk and make the economy more efficient. When we do have one – and it’s when, not if; that’s not me being negative, it’s just that we’re not going to defy economic gravity – we’ll be seeing for the first time how some of these instruments perform under stress.
It’s a rare gilded age in which we live. We should try to enjoy it while it lasts.