February 3, 2011
Professor Summers gave a very upbeat analysis of the current environment.
The cataclysm of 2008-09 was worse than that of 1929 in terms of the speed of the fall. Markets are normally self-equilibrating, but two to three times a century, you get a self-feeding vicious cycle. This is what we got in 2008. The need was to break this vicious cycle and this is what was done in the US under President Obama. As a result, the system was stabilized, and growth is now returning. Growth in the US will exceed consensus this year. Looking forward, it is key to increase exports from the US.
The European drama has not fully played out and will need to be addressed. The US has the best prospects to reach escape velocity.
It is possible that this recession may not figure large in the analysis of future historians. It is possible that the key issues of our time will be seen as the end of the Cold War or relations between the West and Islam. However, the real story is the rise of emerging markets, especially Asia.
From Pericles to 1800, living standards rose only 50%. This has changed radically since the industrial revolution but there is still tremendous potential to catch up in emerging markets. If living standards continuously increase 7% a year in China, over a lifetime they will increase one-hundred fold. This has huge repercussions.
The younger, less-sophisticated periphery, in theory, should take the capital of the developed world. Yet, capital is flowing the other way. This will surely change.
If the US can maintain growth and trade is recognized to be about integrated production, the world will be able to pull through the current crisis. There are three factors to focus on in such a world:
– Manufacturing has become cheap; meaning that the key to growth is the capacity to innovate. For example, Google is worth more than the entire US auto industry.
– Raw material prices are likely to rise, though Professor Summers is not a believer in peak oil, but he does believe that human ingenuity can find solutions. Nevertheless, we are in an era of high commodity prices.
– Technology will continue to transform the world.
The work of the financial sector is still key, as it determines how capital will be correctly allocated for the future.
When asked how to encourage growth, Professor Summers spoke of the need to allow people to win and of the importance for Russia of enabling its talented people to engage with foreign innovation and capital.
As for US dollar hegemony, Professor Summers said he expected it to continue for a long time both as a result of inertia and lack of a credible alternative.