The U.S. in the New World Economy
The International Monetary Fund (IMF) released its October World Economic Outlook (WEO) today. The IMF revised downward it’s projections for world economic growth across the board. Global stock markets predictably fell in reaction.
At the risk of using to many technical economic terms, the IMF reported, ‘It is kinda gloomy but there is a dim light at the end of the tunnel’.
Most interesting to folks in the United States is it clearly points out U.S. decreasing economic power and influence on the world stage.
What is changing? How is it changing? What will it mean for the future of the United States?
The October WEO report holds tantalizing clues.
The Italian Hooker
The biggest news out of today’s report is that IMF economists feel European countries engaged in fiscal consolidation have underestimated multiplier factors. Wow! Sounds like a real page turner don’t it?
What the heck does that mean, you ask? Fiscal consolidation means paying your bills. A multiplier factor is a number used to compute the downward cascading effect of a country paying its bills going throughout its entire economy.
One euro of spending cuts by a government results in maybe 0.25 or maybe 0.50 or maybe 0.75 of another euro of monetary loss to the nation.
For example, say an Italian police officer gets laid off as a result of budget cuts. Then the baker who sells the overweight cop giant pizza slices every day loses that business. The baker makes less so pays less taxes and perhaps – GASP! – has to lay off his hooker to.
As you can see, every reduction in government spending has a cascading effect, sometimes with unexpected consequences.
The smaller the multiplier factor, say 0.5 euro, the less cascading effect it has. The bigger, the more. If it is low then perhaps the baker won’t have to lay off his hooker. In any economy, you need hookers. They create a lot of demand.
The IMF says European countries figured their multiplier effect at 0.5 when they should have figured it much higher, between 0.9 and 1.7.
They present some pretty impressive math to back up their claim but, quite frankly, its boring.
The bottom line is that nobody can afford a hooker in Italy anymore and that is why their economy is going down the tubes.
Hookers all over Europe are being laid off, hence the eurozone economies are in a shambles.
The Light at the End of the Tunnel
To cut a long story short, the WEO says the European Stability Fund (ESF) is gonna ride like a white knight to the eurozone’s rescue and that everybody will live happily ever after with their hookers.
What Does this have to do with the United States?
Nothing. Absolutely nothing!
The United States is not as important as it used to be. The IMF did, however, recognize that the fiscal cliff represents a serious threat to the world economy. Hey, Congress! You guys hear that?
Put into European terms, it means if the sugar daddy across the Atlantic blows his (her?) wad then… no more hookers! That is bad all the way around.
The IMF provided other interesting data. They said global GDP growth would be 3.6% next year. That is down from their April 3.9% prediction.
Heck, President Obama would kill for GDP growth that high right now.
But more important, they said the advanced economies would grow at only 1.5%. All the growth will be in the emerging economies at 5.6%.
The industrialized world is in slow decline while the third world is surging. The United States will be swept aside in the process. U.S. economic preeminence is nearing its end. We are gonna have to adjust.
A word to the wise… if you work in the world’s oldest profession, consider a career change.