2020 is another country: The race to solvency

Come New Year’s Day 2020, we’ll be facing new challenges, but also new opportunities — many of which we can’t even imagine. The year 2020 will be “another country.” And yet despite the many, many unknowns and surprises that lie ahead of us, I do want to suggest to you that there is a lot about the world of 2020 that we really can foresee, at least in broad outline.

American success is not inevitable. But what history tells is that Americans don’t just get worried when our country goes off track. We fix things. Winston Churchill had it just right when he said: “You can always count on America to do the right thing, after trying everything else.” I have to believe that America is too strong, too resilient, and too optimistic a culture to accept the near stagnation and joblessness that some call “The New Normal.” Americans are going to demand something better than that from our leaders. We are going to get our country back on a path to national solvency, and we will be outgrowing our debts well before we pop the corks on New Year’s Day, 2020.

Part 4 of a 4 part series
Excerpted from a speech given at Mutual Fund Wire’s Thought Leadership Series Influencers’ Summit 2011, Boston, Massachusetts, October 5, 2011

Read the speech in its entirety on Scribd.com

As I see it, we are now in the midst of what you might call “The First-World Debt Crisis.” The prime issues driving the news and the markets tend to be questions about sovereign credit risks of default driven more by fears of political paralysis than by absolute lack of resources. Just this moment, there is a wave of worry that suggests that many investors fear these public debt crises will prove impossible to solve.

But what I want to suggest to you is that we will find ways to resolve these challenges using many of the same techniques used to deal with the Third World debt crisis: capital haircuts, loan-restructuring, and refinancings. I am not saying it will be easy. But I am saying that debt crises do get resolved, always. This one will too.

For much of the rest of this decade, I expect the major nations of the world will be forced, like it or not, to engage in a race to solvency, curbing deficits, restoring fiscal and trade balances, and finding ways to reboot their economic growth. Globalized capital markets will demand that nations compete on these terms, and they will.

The “prize” for the winners will be continued access to affordable credit and global investment flows. And among the major competitors, the United States is quite well positioned to win. Here are just a few reasons why:

  • We have a much stronger tradition of limited government and far more reliance on individual and family responsibility than on the welfare state.
  • It should be far easier politically for the United States to get back on a path of sustainability than for our friends in Europe or even Japan.
  • Unlike Europe, we not only have a common currency, but a common government and central bank.
  • What’s more, Americans can already see from the Europeans’ current struggles the consequences of simply allowing deficits and debt to pile up to a tipping point and then having to slash government benefits under market-driven crisis conditions.

Even those Americans most committed to sustaining social welfare programs and a true safety net are beginning to recognize that our entitlement programs require major change, either by us or by some very ruthless market forces.

The good news is that we are already moving to address our long-term deficit problems. America’s political discourse has changed fundamentally. Following President Obama’s health-care bill, for example, policy debate on health care is now focused mainly on curbing cost increases, and it will be for years to come.

After the very disappointing results in terms of jobs from the massive surge in government spending in 2009 and 2010, any appetite for more tactical stimulus spending is gone. In its place, we are seeing a demand for more strategic, pro-growth reform of our tax code. As we speak, a bipartisan select committee of Congress is struggling to find, by this Thanksgiving, an additional trillion-plus dollars in cuts to future deficits. Even if Congress fails — and it may — there will still be major, automatic cuts in defense and other discretionary spending — painful ones.

The issue of national solvency will not go away. America’s next presidential election and the politics of the rest of this decade are going to center on ways to reboot economic growth and job creation, cut spending, and get our debt under control. I believe we’ll do that.

In fact, I expect that come 2020 we will look back on 2011 with the same sense of relief that we now look back on the stagflation, gas lines, and national malaise of the mid-1970s. What’s more, by 2020 the next phase of America’s future will begin to positively influence our expectations.

Seen from the perspective of 2020, America’s demographic and economic advantages over global competitors will be much more visible than they are today. America in 2020 will not only have a still-growing population, but will be heading toward well over 400 million people by mid-century. By contrast, the populations of Japan, Russia, most of Europe, and even China will be in decline by 2020, with some of them on track to a population implosion by century’s end.1

America will be relatively younger than our major global rivals, less burdened by welfare-state expenses, and far less dependent on imported sources of energy. Our per capita GDP will still be the highest in the world — more than four times higher than China’s, according to the World Bank. And America’s culture of innovation, our openness to continuous change, will still be carrying us forward.

One last point: America’s leading corporations are in great shape financially at the beginning of this decade. They have been earning record profits; they now hold over $2 trillion in cash on their books.2 They have truly global footprints, drawing 40% plus of their revenues offshore.3 There is actually a case to be made that core U.S. equities could have major upside by 2020.

Obviously, none of us know how markets will perform from here to 2020. And we know that we’ve just lived through a lost decade with negative returns to the S&P since the year 2000. But unless you believe our economy is in for such sustained hard times that equity markets will do worse from 2000 to 2020 than in any previous 20-year time frame, then the opportunity risk of missing gains over the next decade may be very much higher than the downside.

1. United Nations, Populations Division, 2011.
2. Federal Reserve, 2011.
3. U.S. News and World Report, 2011.

The views and opinions expressed are those of Robert L. Reynolds, President and CEO, Putnam Investments, are subject to change with market conditions, and are not meant as investment advice.