What I tend to focus on, however, are the longer-term structural adjustments and rebalancing in our post-bubble economy that need to occur before a robust and sustainable recovery can begin. And from that perspective, the signs are positive.
For starters, as bad as things may seem here at home, they look even worse just about everywhere else. After years of watching the momentum and the investment capital flowing out of the country, it’s now encouraging to see it begin to flow back our way. Not only is that helping to hold down interest rates and lift stock prices, but there are signs of renewed interest on the part of foreign firms in expanding production and operations in the United States. That translates into more jobs and higher incomes.
A decade ago, places such as China and India seemed to have all the mojo — so much so, in fact, that they wound up with bubble economies of their own. Now, in face of excess capacity and sharply higher operating costs, that excitement has waned, along with the flow of capital and technology. Even the Chinese have decided to get serious about rebalancing, allowing their famously manipulated currency to rise to something closer to its real market value while redirecting some of its trade surplus with the United States from Treasury bonds to direct investments in American companies.
There is a growing realization among investors and global executives that China and India still lack the political and institutional infrastructure necessary for an advanced economy. Another round of reforms will be required before those countries will see a return to the growth rates of the past decade.
Europe is a different story. The bubble years allowed much of Europe to avoid making the kind of structural changes necessary to put its social welfare system on a sustainable fiscal path and reform its labor and product markets. The euro crisis — which is both a banking crisis and a sovereign debt crisis — has forced Europeans to begin addressing those issues. But the noisy process will take years to complete, if for no other reason than it requires Europeans to accept, at least in the short run, a lower standard of living. That Europe will dip back into recession is all but certain.
My optimism about the U.S. economy, however, is not based simply on the woes of others, but also on the restructuring momentum I see here at home.
After an extended period of denial and pushback, the financial sector is finally accepting the reality that it had become too big, too risky and too generous with its compensation. Under pressure from shareholders and regulators, big banks are shrinking their leverage and balance sheets, off-loading their hedge fund-like activities, shedding employees and reducing the percentage of net revenue set aside for compensation.