So this is Christmas, and what have you done? Another year over, and a new one just begun.

Well, one thing we can say without fear of contradiction: the global economy is one year older, too, but what has it done?

The Sudoko puzzle
Is China changing?
Wages, the rich, and why super rich is bad for the economy
Currency war
Eurozone’s troubles
Tectonic plates
The cult of equities
Technology and Moore’s Law
Best of the year

Back in January, Meryn King explained it all with a Sudoku puzzle.

Sudoko for economists rounded to nearest $50bn source Bank of England speech from Mervyn King
  Domestic demand Net trade GDO
High saving countries 18,000 -11,000 19,000
Low-saving countries 28,500 +11,000 27,600
Total 46.500 0 46,500

And his rather clever little diagram says it all. The global economy began the year with massive imbalances. They have not gone away. See: Why Sudoku explains what’s wrong with the economy In other words, some countries were saving too much, while other parts were spending too much. And in December, the OECD said much the same thing; see: West needs to save more: emerging world needs to spend more, says OECD.

 is China chaning?

But at least China is waking up to reality. There is a growing realisation in China thatshe cannot rely on the export model for much longer, and a part of her transformation lies in wages going up. There are signs it is happening; see: At last, Chinese wages rise: is this the end of bubbles? China solves economic crisis, with cunning plan and . See also: Now China is number one for car sales , and Chinese imports outstrip exports . See also: Not even the IMF can make up its mind over China and the yuan There is an answer to the problem ; see: End of US hegemony, why the Bancor and not gold will be the new currency

And yet China is a complicated country. The central government does not have quite the sway that is commonly thought; see: China: the government is not omnipotent – it is impotent; and that’s where the West has got it wrong

Wages, the rich, and why super rich is bad for the economy

But one of the big problems in the West, especially the UK, is that we are set to get worse off. But more to the point, this is what forecast projections say. Take this table, for example, based on figures produced by the Office for Budget Responsibility:

  2009 2010 2011 2012 2013 2014 2015
Average earnings 1.8 2.3 2.2 2.4 3.8 4.4 4.4
RPI 0.6 4.0 3.4 3.1 3.1 3.4 3.6
Difference between RPI and average wages 1.2 -1.7 -1.2 -0.7 0.7 1.0 0.8


Our analysis 2009 2010 2011 2012 2013 2014 2015
Cumulative difference between RPI and average wages since 2009 1.2 -0.5 -1.7 -2.4 -1.7 -0.7 0.1

To put it all another way, it won’t be until 2015 before real wages return to the 2009 level.

Verdict produced research at the beginning of the year in which it drew a similar conclusion; see: We will be worse off in 2013, says report

Part of the problem is that globalisation has created a situation in which corporate profits have been taking up a higher share of GDP, and wages growth has been such that the only way consumers can spend the monies necessary to promote growth, is by running up debt. See; Did globalisation cause the economic crisis? , and see: Why the super rich should pay more tax, and the rest should pay a lot less 

 It seems that as profits have risen across the world, these profits have funded consumer debt. It is supposed to be different. Growth in profits is supposed to fund growth in wages, which creates demand, leading to more corporate profits. Instead, growth in corporate profits has funded consumer debt, which created demand to push profits up even further, but ultimately such a relationship is unsustainable.

Currency war

Then there was talk of a currency war. It was the Brazilian finance minister who really spooked markets with his currency trade warning; see: Print money, or it’s the end of democracy, says Bank of England man; stop printing money, or it’s trade war, says Brazil , and: IMF head Strauss-Kahn warns of currency war . And see also: World leaders accuse each other of being “no good, lousy sons of an expletive” So the US goes nuclear and prints money via quantitative easing, pushing down the dollar, and China refused to allow the yuan to appreciate.

Eurozone’s troubles

Meanwhile in Europe, the slow motion car crash drags on. It is difficult to separate fact from hype within the indebted regions of the Eurozone, but this article may help: Portugal and Ireland – debts, wages and house prices: how do they really stand? . So will the euro survive? One former Nobel winner reckons that eventually it will be Germany that pulls out of the Euro; see: Germany may pull out of Euro, predicts Joseph Stiglitz

Tectonic plates

But look beneath the surface, and there are some fascinating developments.

It seems China is running out of workers, and could be closing in on what’s called the Lewis Turning Point, when a developing country runs out of capacity to grow via workers migrating from the countryside to the towns. But we suspect this is a good news story. Chinese wages will surely rise as a result of this demographic shift, and as a result Chinese imports will go up and we will move a step closer to seeing the end of global imbalances. See: The world’s most populous country is running out of workers – what are the implications?

What is quite interesting is that 2010 saw two reports making similar conclusions. But they differed in one key respect. The first presented its conclusion as if it was bad news. The latter, as if it was good. In the Barclays Equity Gilt Study, Tim Bond, co-author of the report, said: “We are moving from a world of capital abundance to a world of capital scarcity and scarcity of savings. From here on yields should probably double over the next decade…This will happen as pensions liabilities come due and as there is decreasing savings to support the economy.”

He continued: “The financial crisis, from this point of view, happened at the worst possible time – just as this demographic change was starting to take place.

“It is very unlikely that the excess savings of countries like India and in Africa with lower average ages will be able to compensate for the fall in savings in the West.”

The report also said: “The common assumption that future savings flows from the large developing economies will be a ready source of finance for the ageing advanced economies is most probably flawed. The projected trajectory for old age dependency ratios in countries like Brazil, China or Russia are as severe as in the US. It is highly implausible to believe that Africa, the Middle East and India will be capable of funding the rest of the world’s growing population of retirees….Because the rise in old age dependency ratios is common to virtually all significant economies, the idea that a redistribution of global savings flows from surplus to deficit nations might mitigate the impact of ageing on bond markets is a false comfort.”

And yet McKinsey Global predicted a rising demand for capital and falling savings rates, and, like Barclays, said interest rates will rise. That’s not good. But it also predicted a new golden era of growth, like we saw in the 1950s and 1960s. So that seems pretty good. In fact, for what it’s worth, we reckon this was just about the most interesting report we saw all year. See: Interest rates set to rise as economic tectonic plates shift – is this good or bad news?

The cult of equities

And then there’s equities. The FTSE 100 hit its highest level since 2008 yesterday. But what about next year? There is a growing belief it will hit a new all-time high. But what about the underlying forces? Here are some ideas on where equities may be going in the long term.

Is the cult of equities dead?
Is UK stock market overvalued? Part 1
Is the stock market overvalued? Part 2
The cult of equities is still dead, claims bear

Technology and Moore’s Law

Technology may come to our rescue in the end, however. See: The case for optimism , Are commodities the next bubble? , and: New technological leaps could solve fuel crisis

As for jobs.

It seems we will see a race next year. Can the private sector put on jobs faster than the public sector sheds them? See: Private versus public: the great jobs race begins

Best of the year

And finally, why don’t we leave you with
our two favourite articles of the year:
US and China circle each other like sharks preparing to strike , and: Ya who?, Google profits, and the Android from Mars

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

© Investment & Business News 2013