5 Things to Know About the Global Economy Right Now

Why Japan is a wildcard, the Eurozone's in trouble, and the BRICS are a bust.

Things could be worse, right? Having shaken off the jitters that saw shares drop at the end of July, the major markets have been enjoying another period of relative stability. Apart from Argentina's comic default and a few geopolitical flare-ups, little has happened to raise fears of another crash. The unemployment rate has been falling steadily -- if slowly -- in the United States, Eurozone, and even Japan, where more people are also joining the labor force. Domestic demand has returned even as the fringes of the global economy have frayed. But is there a storm around the corner? Here are a few things to keep in mind as we look to the next couple of years:

1. The Federal Reserve is not out to surprise anyone. For years, the Fed has been saying that it will wait until 2015 to raise interest rates. Nothing has happened to change that plan. As the new year approaches, long-term interest rates -- the kind you pay on a mortgage or car loan -- are sure to rise in response to the coming increase in the short-term rates controlled by the central bank, which is likely to be sustained for some time. Before that happens, we may see a rush of house purchases in the United States as buyers scramble to lock in their loans. Continued strength in the labor market, which gives people faith in their future income, will likely reinforce this demand. Rising rates will be a signal that the Fed believes the economy is on a firm footing, and new inflows of foreign capital are likely to follow. The gap between rates of return in the major markets and frontier economies will shrink, which could be bad news for the latter group -- but more on that later. 

2. The Eurozone is still in trouble. At the moment, the Eurozone is in a race against itself. Households have been drawing down their wealth to pay their bills while waiting for jobs to return; young people have been kept afloat by their parents. The question is whether employment will increase before the wealth runs out. In the past few months, the unemployment rate has begun to fall in several of the countries most affected by fiscal and financial crises. Italy is still suffering, however, and is heading for last place. New rules for fiscal stability and banking, the two centerpieces of the European Union's recovery package, won't save the economy in Italy or anywhere else in the short term; it's a long road back even for countries like Spain, which has tried to revitalize its economy with extensive reforms of the public sector. Two summers ago, a group of graybeards suggested the Eurozone would not recover fully until 2018; that prediction may well be accurate.

3. Japan is a wildcard in global credit markets. The central banks of the United States, the Eurozone, and Britain are far more independent than Japan's, and their leaders coordinate policies more closely as well. But a shift in domestic political winds can change economic policies dramatically in Tokyo, as it did when Shinzo Abe led the Liberal Democrats to a huge victory in 2012. Within weeks, the Bank of Japan initiated a whatever-it-takes quest for inflation. The next general election is in 2016. If Abe's policies fail to yield growth by then, Japan could be under new management once again. A sudden disruption in the global economy's ample supply of liquidity is most likely to come from here. The Bank of Japan currently buys about $70 billion in securities every month as part of its credit easing program, which is only a bit less than the Fed bought at the height of its activities. The Fed has tapered its purchases slowly and with plenty of warning. Japan might not.

4. China has an enormous opportunity to grow. It hasn't been the best few years for China. Its dependence on exports, not to mention its internal struggles with credit markets and state-led investment, has led to big downgrades in expectations for growth. The shift from foreign to domestic demand sought by Beijing has not been easy. Between April 2011 and April 2014, the International Monetary Fund's forecasts for growth from 2012 through 2016 fell by a total of 14 percent of gross domestic product -- the equivalent of about two years of current growth going up in smoke. Since then, the forecasts have stabilized, and the ambitious package of economic reforms proposed last year may soon start to push them higher. Xi Jinping has consolidated his power. If he pushes the reforms through without causing too many dislocations in financial markets, particularly as the shadow banking system is formalized, then a new flood of foreign capital will be sure to follow. If it turns into a gold rush, then interest rates in other markets -- especially emerging markets -- could rise as the supply of credit dries up.

5. Emerging market acronyms are marketing tools. Remember the BRICs, or BRICS? Growth has petered out in all of them except China, and even there the numbers have disappointed. Then there were the Next Eleven. Of those countries, fewer than half -- Bangladesh, Indonesia, Nigeria, the Philippines, and Vietnam -- experienced the kind of expansion that would make investors' eyes sparkle. And who can forget the CIVETS? They were supposed to grow by 4.5 percent per year through 2030. That may still come to pass if we treat the group as one big economy, but for all of the individual countries it seems unlikely. With the Fed gradually decreasing the supply of easy money starting next year -- and more opportunities perhaps opening up in China -- investors will be a bit pickier in emerging markets; that means looking at them one by one rather than in arbitrary groupings.

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Despite sanctions on Russia, belligerence in East Asian waters, chaos in the Middle East, and other distractions, the biggest wheels in the global economy have continued to turn. Even as the companies that move markets have expanded around the world, investors and executives have become more adept at insulating themselves from temporary hotspots. Insurance, hedging using derivatives, the globalization of purchasing, and the proliferation of transport options have all helped. But geopolitical troubles still constrain growth and make it tougher to establish new business relationships. If things ever settle down, the world will be wealthier still.

Sean Gallup/Getty Images for Siemens


Double Diss

With her knock against Obama, Hillary Clinton was criticizing more than one former president's foreign policy.

For me, the surprising thing about Hillary Clinton's lengthy interview with the Atlantic was not her subtle dissing of the president whom she served for four years. If you've been watching her for the past 20 years, her willingness to shape-shift when needed is not news. Nor was it surprising that she took decidedly hawkish positions on some big issues, as that mindset has been her calling card ever since she started running for office herself.

Instead, the surprising -- even ironic -- aspect of the interview was that Hillary was also implicitly dissing the basic approach to foreign policy that her own husband had followed in his eight years as president. While Clinton was careful to praise Obama's thoughtfulness and raw smarts, her overall message was that he has been too cautious in using American power to address various problems. As she notes at one point, subtly positioning herself between Obama and George W. Bush: "when you are hunkering down and pulling back, you're not going to make any better decisions than when you were aggressively, belligerently putting yourself forward."

Yet if we compare Barack Obama's basic approach to foreign policy with Bill Clinton's, the similarities are in fact striking. Both Obama and Clinton were committed to maintaining U.S. "global leadership." Both favored spreading democracy where possible, but turned a blind eye toward various dictatorships when circumstances seemed to require it. Both sought to engage a rising China, while hedging against a future rivalry. (Obama did more of the latter, of course, because there is now more to hedge against). Both tried to advance the Israeli-Palestinian peace process, but both failed miserably because they refused to take on Israel's supporters at home. Both presidents made on-again, off-again efforts to improve U.S. relations with Iran. Both successfully preserved existing U.S. alliances in Europe and Asia, and sought to build new partnerships with countries like India.

But most importantly, both Clinton and Obama were highly risk-averse regarding the use of American military power. Clinton pulled U.S. forces out of Somalia after the infamous "Black Hawk Down" incident, and did not try to halt the 1994 Rwandan genocide. He sent U.S. peacekeepers into the Balkans with great reluctance, and declined to use ground troops during the 1999 war in Kosovo. Instead, Clinton preferred to use air power and/or economic sanctions, whether he was sending cruise missiles into Sudan or Afghanistan or having the Air Force patrol "no-fly zones" and conducting occasional punitive raids in Iraq. Both Clinton and Secretary of State Madeleine Albright were fond of describing the United States as the "indispensable nation," but they ran U.S. foreign policy in as cheap and risk-free a manner as possible. It was, as Fareed Zakaria noted in 1998, something of a "hollow hegemony."

Ditto Barack Obama. Like Clinton, a defining feature of Obama's foreign policy has been a reluctance to commit ground troops or take on ambitious new social engineering projects, especially in the Arab and Islamic world. The sole exception was the 2009 Afghan surge, but even that dubious move was heavily circumscribed and its notable lack of success may have taught the neophyte president a lesson. Since then, he's used drones, Special Forces, and airpower in a surprising number of places, but has mostly kept U.S. boots off the ground.

Not only was this policy entirely (Bill)-Clintonesque, it made even more sense given the conditions under which Obama took office. The U.S. economy was growing rapidly in the 1990s and Clinton faced no major foreign policy challenges, whereas Obama took office in the aftermath of two losing wars and major financial crisis. After 2009, in short, a judicious approach to foreign policy was precisely what circumstances required. (Interestingly, Hillary Clinton acknowledges this point in her interview, saying Obama "is cautious because he knows what he inherited, both the two wars and the economic front, and he has expended a lot of capital and energy trying to pull us out of the hole we're in.")

Viewed in this light, the real aberration is not Obama but rather George W. Bush, especially during his first term. Thrown for a loop by 9/11 and under the spell of Dick Cheney and the neocons, Bush rashly decided on a bold and risky campaign to transform the Middle East at the point of a gun. It was a fool's errand, as we now know, and a dramatic departure from the caution that characterized the Clinton and Obama presidencies.

Meanwhile, as the Obama administration gets ready for its final lap, what is most striking is the continuity in America's basic approach to the world over the past twenty years (to repeat: it is the period 2001-2004 that is the real outlier). Somehow, "change you can believe in" has become "change you can barely detect." No matter how hard he tries, Obama can't seem to get out of the Middle East maelstrom. No matter how often he says that not every problem is a nail, he keeps reaching for the military hammer (albeit in small doses). The United States is talking to Iran -- finally -- but it is far from clear if Congress will let Obama reach a sensible deal. The United States still gives Israel unconditional support, and then wonders why it has no leverage over its conduct and can't make any progress toward a two-state solution. And as FP editor David Rothkopf recently noted, the United States has still not come up with a smart response to Islamic radicalism. Instead, just about everything we've done since al Qaeda first emerged -- from invading Iraq to droning Pakistan to cuddling up to Saudi Arabia and Egypt's president Abdel Fattah el-Sisi -- has made the problem worse.

Why does the United States keep repeating the same mistakes, and occasionally inventing new ones? I'd highlight four main reasons.

First, as I noted a couple of years ago, the United States does a lot of these things because it can. America is simultaneously wealthy, basically secure, and has a lot of residual capability even today. No other country could even consider organizing the aerial intervention Obama has recently ordered in Iraq, whereas the United States can do this without having to mobilize the nation or do more than lift the phone and issue the order. And because the United States is mostly secure back here in the Western hemisphere, it thinks it can do these things without creating greater risks for itself. As I wrote back then:

"It is as if the president has big red button on his desk, and then his aides come in and say, 'There's something really nasty happening to some unfortunate people, Mr. President, but if you push that button, you can stop it. It might cost a few hundred million dollars, maybe even a few billion by the time we are done, but we can always float a bit more debt. As long as you don't send in ground troops, the public will probably go along, at least for a while and there's no danger that anybody will retaliate against us -- at least not anytime soon -- because the bad guys (who are really nasty, by the way) are also very weak. Our vital interests aren't at stake, sir, so you don't have to do anything. But if you don't push the button lots of innocent people will die. The choice is yours, Mr. President.'

It would take a very tough and resolute president -- or one with a clear set of national priorities and a deep understanding of the uncertainties of warfare -- to resist that siren song."

Second, the United States keeps doing the same things because the same people are still in important positions and the same mindset of exceptionalism and "global leadership" still dominates. As Michael Glennon describes in a recent article (and forthcoming book), the permanent U.S. national security establishment is large, well entrenched, and still committed to trying to run the world. Even a relatively moderate president has only limited ability to alter its course. Just look at the incestuous group of insiders who've been running our intelligence services over the past two decades -- and who remain in office despite serious questions about their integrity and truthfulness -- and you begin to understand why the same policies persist.

Moreover, to paraphrase Donald Rumsfeld, "you run foreign policy with the team you have." Obama didn't hire the folks from MoveOn.org to run his foreign policy; and he didn't even bring in any card-carrying realists. Instead, most of his foreign policy team was well-vetted Democratic Party liberal interventionists who had openly backed the Iraq war and were strongly committed to using U.S. power to right the world's wrongs. How else did the United States end up creating a failed state in Libya? But as veterans of the Clinton era, most of these people also understood the United States could maintain an ambitious foreign policy if it didn't cost too much. This combination of vast ambitions and limited resources inevitably led to the United States taking on too many projects, using half-measures on all of them, and completing very few of them successfully.

Third, because the United States rarely holds anyone accountable for past failures, the same discredited pundits and politicians can keep peddling the same nostrums and be taken seriously by the media and the public. Meanwhile, the people who turned out to be right -- but at odds with the prevailing consensus -- end up marginalized or ignored. It would be hard to invent a surer recipe for repeated policy failure than that.

Lastly, the quality of U.S. foreign policy is also affected by its favorable geopolitical position and unusually permeable political system. Because the United States is so strong and so secure, it can afford to be cavalier about its national interest and politicians can worry more about their own careers than about doing what is right for the country as a whole. In other words, they are free to pander to special interest groups of various kinds, and to let domestic politics trump larger strategic considerations. Such problems diminish in the face of truly grave threats (though they do not disappear), but America's dominant position since 1992 gives official Washington the luxury of being irresponsible.

To return to former Secretary of State Clinton's recent interview: it's clear many readers were alarmed by the hawkish views she expressed on certain issues and some now fear that her election in 2016 would bring neoconservatism back in from the cold. Although the endorsement she received from the Weekly Standard should worry her (seriously, how many disastrous policies has one magazine managed to endorse over the years?) I'm not actually that concerned. For if one reads the interview carefully (and not just interviewer Jeffrey Goldberg's hawkish gloss), it's clear Clinton understands George W. Bush blew it big-time, and that repeating his mistakes will doom the next president as well. What's less clear is why she didn't openly embrace the more prudent policies that both her husband and her former boss championed. My guess: she was just reacting to the president's favorability ratings and pandering to the usual suspects, which is what anyone running for office is likely to do these days.

I don't know if she will run, if she'll win the Democratic nomination, or if she'll triumph in the general election. But if she is elected, the safe bet is that she'll just be business-as-usual in foreign policy. She won't promise change -- as Barack Obama did -- and for the reasons noted above, she not going to deliver it either.

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