The Economy of 2020
In keeping with the theme of looking to the future, it might be a useful exercise to look at what are reasonable expectations for what parts of the US economy will be like a decade from now. I say “parts” of the economy because it is nearly impossible to predict the complex combination of trends, forces and events that make up the whole.
We can, however speculate just as we can say with some confidence that, in general, it will get cold again next winter, there are a few things that we can say with reasonable certainty about the economy of 2020.
Let’s begin by defining what the world will be like in 2020. China, India and the US will collectively account for 55% of the global gross domestic product (GDP) representing one third of the total world population. Asia’s share of the GDP will be more than twice as large and the US. China will surpass the US as the world’s biggest consumer market. Much could be written about the known and probable impact of the rising markets in China and India but to keep this article reasonably short, let’s limit our look to how it will affect the US and Vermont economy.
The cost of oil – more specifically, gasoline – will probably be the largest single change between now and then. There have been no new oil fields discovered in the past 30 years and some believe that the total known world supply is now down 50% - the so-called “Peak Oil” point. The Government Accounting Office reported that of 21 serious studies trying to date reaching Peak Oil, 19 of them conclude that we will reach it by 2040, but 16 of them place it before 2030 and 8 place it before 2020. The variable is the unknown quantity of oil that remains in the ground. What this means is that sometime in the coming century, we are likely to see the effective end to petrochemical fuel use for transportation.
However, by 2020, the demand created by China and India and others will have doubled the current 80 million barrels per day production requirements. Conservative estimates from the Congressional Research Service projects that China alone will “generate increases in demand by 500,000 barrels per day or more”. This exceeds the current production capability of both existing oil fields and existing refineries. The result will be that oil will be rationed, bid on or fought for – all of which will raise the prices.
There are possible sources for more oil – deep ocean wells, Canadian tar sands, shale and old well recovery schemes, but these become cost effective only because the price of oil has risen high enough to make them worth developing. We may well discover other fields but the industrialization of China, India and many other third world countries will most likely more than absorb any new sources found or developed.
Increased oil prices will impact the entire economy with higher prices. What is not made with petro-chemical products is transported by petroleum fuels or powered by utilities that use petroleum fuels. Typically, this will extend to a consumer spending slowdown, which will impact the rest of the market – worldwide.
Unfortunately, unlike previous oil price increases that came at a time of robust economic growth and high inflation, this rise will happen when the world economies are dealing with marginal economic growth, an aging population of baby boomers, unstable political conditions and low inflation. That means that sellers of goods that are impacted by rising oil prices will have little room to pass those added costs on to the consumer. Governments will have little sway with inflation controls (like the FED interest rate cuts) because they can’t cut the rates any lower when it is down to near zero. The end result is that there will be first, stagflation – slow or zero economic growth and rising unemployment. Inflation may very well increase simply because governments will need to inject more money into the system as tax revenues decline but public costs rise. There will be tax increases but in the US they will be subtle and hidden – such as letting previous tax cuts expire or lowering the levels at which higher tax rates apply and raising the levels at which tax decreases apply. This is common practice for US politicians so that they cannot be held accountable for lowering spending.
Unfortunately, these short sighted and short-term offsets are effective only for a limited time and then they become part of the problem. Higher taxes paid results in less money to be spent in the economy. Higher costs for the same goods while salaries and jobs remain level or decline will kick off a recession – a decline in GDP –, which will evolve into an economic depression – a larger decline in the real GDP. Because of the world economies dealing with marginal economic growth, an aging population of baby boomers, unstable political conditions and low inflation, this depression has the potential to be more severe and longer lasting than any since 1929.
See my other articles about the problems that the baby boomers will inject into this mess.