What does Goldilocks have to do with the global economy? That's the question I was asking after reading a report in which Laura D. Tyson, the current dean of the London Business School (and former chairwoman of Clinton's Council of Economic Advisers), said at the Global Economic Forum in Davos this week that "the outlook for 2006 is basically another goldilocks kind of year."
Not too hot, not too cold, the little bear's porridge tasted just right. The so-called Goldilocks scenario (which sounds kind of like a title Robert Ludlum might have once considered but then wisely dismissed) means that inflation is low, interest rates are low, and growth is strong, but not too strong. Such characteristics described the global economy in 2005, and, said Tyson, may well do so again, despite naysayers who are worried that this might finally be the year in which the dollar crashes, the U.S. housing bubble pops, and the American consumption juggernaut runs out of steam.
In related news, sales of existing homes fell 5.7 percent in December. This was the third straight month of decline, and the murmuring about the long-awaited end of the housing boom is beginning to grow. We can't pay enough attention to this economic indicator.
The paradox about the current state of the American economy is that every day we read stories about factories being closed, manufacturing jobs moving to China, stagnant wage growth for workers, and yet, the economy as a whole keeps chugging along. One part of the explanation is that the distribution of wealth is all screwed up -- richer Americans are grabbing a bigger chunk of the gains from participating in the global economy than are poorer Americans. But it's not the whole explanation, because average-income Americans are still consuming up a storm, despite the hit the middle class seems to be taking.
The answer to the paradox is funny money, something that Goldilocks might consider, if she was wise, a little too hot to handle. Let's go now to some downbeat prognosticators at Morgan Stanley, who offer up a pretty useful roundup of the views of their economists for all to read. They're not so high on the three bears. But the money quote, for me was this:
"First, the victims of globalization -- unskilled workers in high-income countries -- have been defending their lifestyles with debt, but may not be able to do so in 2006 due to higher interest rates and the surfacing credit problems in this segment. Globalization has appeared a win-win for everyone so far. This is just a perception. Stagnant income growth among unskilled workers in high-income economies is a telltale sign. This should not be surprising, as unskilled workers in rich economies now compete against workers in developing economies that are muscling their way into the global economy."
"The global economy has paid no price for this income shortfall, because financial innovations have provided this population segment with debt to defend their lifestyle."
If you own a home, you have no doubt been the recipient of numerous phone calls and letters over the last couple of years telling you how you can save lots of money by refinancing your mortgage in a variety of "innovative" ways. Most of these innovations involve taking advantage of currently low interest rates. If interest rates rise, and the real estate boom continues to subside, the true costs of the global economy for the American middle class will become impossible to ignore.
The timing of how this plays out is critical. If the U.S. economy runs aground over the next 10 months, control of Congress could be up for grabs. But if Goldilocks keeps happily eating the little bear's porridge, the status quo may not budge.