Reply #32: A Tale of Two Countries

[54anickel]

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=49265

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

- “A Tale of Two Cities,” Charles Dickens

It was autumn in the fifth year of the third millennium.

On that side of the Atlantic “pond,” on a little island that calls itself Great Britain, it was the best of times. In contrast to its neighbors on the Continent, Britain had rung up an extraordinary period of growth and prosperity over the last dozen years. Recovering dramatically from the deep recession of the early 90’s, the UK had enjoyed its longest expansion since the Second World War. GDP growth in the new millennium had averaged around 2.5% per year, unemployment had halved from 10% in 1993 to 5% in mid-2005, inflation during 2001-2005 was a tame 1.5% per annum, while the Bank of England base interest rate had dropped from 14% in the early 90s to 4.5% in mid-’05. Housing values had appreciated faster and faster … in late 2002, annual house price appreciation hit 25%! Britons were getting dramatically wealthier and it showed. Home equity extraction and other forms of consumer debt fueled consumption with retail spending rocketing ahead at real annual growth rates of 3-4% during ’03 and ‘04. More than 600,000 Britons, over 1% of the population, now owned holiday homes abroad … especially in France and Spain. It was a dramatic turnaround for a nation that 25 years ago was dubbed the “sick man of Europe.” The performance stood in stark contrast to the major European economies that were stuck with low growth and double-digit unemployment rates.

On this side of the pond, a big island known as the cradle of liberty and democracy, the USA, also basked in the glow of prosperity and global dominance. The world’s only remaining superpower, it was also the engine of global economic progress … especially as the world’s 2nd and 3rd largest economies, Japan and Germany, remained mired in slow/no growth. Over the last 15 years it too made gigantic strides – growth averaged more than 3% annually, unemployment dropped from 8% in the early 90s to 5% in 2005 and long-term interest rates (the 10-yr Treasury bond) fell from over 8% in 1990 to around 4% in 2005. The only recession in this period was in 2001 and it was the shallowest and shortest recession in the post-war era. Core inflation dropped from over 4% in the early 90’s to less than 2% as the new millennium dawned. There was a dramatic renaissance in American labor productivity, zooming from the sclerotic 1.5% - 2.0% in the 70’s and 80’s to more than 3% by the late 90’s. And there was a meteoric rise in American wealth … first with the stock market boom of the late 90’s and then with the housing boom of the early 2000’s. The dominant nation of the 20th century, the USA, was at the “top of its game.”

Indeed, for the entire English-speaking world it was the best of times. In the Far East, incomes and wealth were rising rapidly in Australia and New Zealand. Ireland’s spectacular growth had earned it the title of “Celtic Tiger”. And here, in North America, things were bubbling along nicely north of the border in Canada.

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