Above is a diagram put together back in 2011 that was shared and discussed with our Beacon Pointe Investment Committee. Even though this chart of the Global Economic Path is over 1 ½ years old, the situation in which each of the developed world countries charted above finds itself hasn’t really changed, and their location on this map remains the same.
What this chart shows is a Global Economic Path which goes in two directions. The path itself is the squiggly blue line that gets very “wavy” at the left end and rather smooth at the right end. The left end of the path represents total economic failure. Economic failure is defined as a country that has accumulated so much debt that they are bankrupt AND no one is willing to lend them any more money. The only way out is to hit the RESET button and start over. This is extremely tough because inflation becomes massive for a period of time and social unrest becomes seriously significant.
The right side of the path represents economic prosperity. This is the direction a country wants to be moving towards if not there already heading in that direction. The further right a country is on the path, the more economic prosperity the country should experience. A prosperous country has significant foreign investment, manageable debt, a thriving economy, and an improving standard of living for its citizens. Theoretically, a country wants to be off of the right side of this chart, like Brazil would be.
Since 2008, most of the developed world has been regressing and moving in the wrong direction – from right to left. The arrows that lead off of the path (with a right hook) represent off-ramps back towards prosperity that exist at different points along the road. There are opportunities for countries to exit onto these off-ramps and head back in the right direction by making the right decisions – be it through fiscal reform, industrial revolutions, etc. However, as you will see, the closer a country is to the “end of the road” on the left side, the bumpier that road becomes and the more difficult it becomes to get onto those off-ramps. The road gets bumpier and the exits toward prosperity more difficult because the options to solve a country’s problems become fewer and much more painful.
For example, take a look at Greece. Greece has missed the last off-ramp and the choices it faces are few and all are painful. The country is essentially bankrupt with no possibility of paying back all of the debt it has amassed. In fact, some of the debt has already been forgiven. In order to stay in the Euro it will have to be kept on life support by the EU. Greece’s choices effectively come down to either A) stay in the EU and suffer a prolonged economic depression (caused by big tax hikes and huge spending cuts) where unemployment could hypothetically be 30% and social unrest considerable or B) leave the Euro, suffer massive inflation and very significant social unrest and chaos. Those are really the only solutions left for Greece. If that isn’t painful or undesirable, then I don’t know what is!
Contrast this with the USA located towards the right side of the path. The USA has several more opportunities left to get onto the off-ramps towards prosperity, but our government is currently not taking advantage of these opportunities. You will see on the chart that we passed an off-ramp right on by between the summer of 2011 and again at the end of last year (2012), when our government failed to agree on meaningful cuts in our fiscal deficit. Our country’s options aren’t easy, as we will need to address reforming some very sacred spending items like entitlements, heretofore considered political suicide. However, the longer the U.S. government goes on not making the tough decisions that will put our country onto one of the prosperity off-ramps, the harder and fewer the potential solutions become as we continue to dig a deeper and deeper hole with the debt our country is amassing. I hope we find some leadership in Washington that is willing to make these tough but necessary decisions so that our country doesn’t end up at the same place on the road as Greece. I don’t think that this will happen, but I will leave that scenario for another blog.
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