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JUNE 28, 2004
Here Comes A New Global Economy The summer often provides a time for people to pause and ponder how best to plan for their kids' education or their own retirement. This year, a close race for the Presidency, interest-rate jitters, and continued turmoil in Iraq appear to make investment decisions even more difficult. But investors might do well to look not only at current economic and political events but through them to long-term fundamentals. The next 20 years will be significantly different than the past two decades. The global recovery under way has a different shape from previous upturns. Understanding this may well be more important to individual investors in the long run than trying to second-guess Federal Reserve Chairman Alan Greenspan's next move or trying to play the November election with stock portfolios that reflect a Bush or Kerry win. Here's why: DEMOGRAPHY RULES. The baby boomers will finally retire over the next 20 years. The oldest, born in 1946, will reach 62 in 2008. Watch them throw their political weight around. The $1.3 trillion Medicare drug benefit may be just the start. Will politicians really let the capital gains and dividend tax cuts sunset in 2008 as scheduled? Will boomers also demand that taxes on their 401(k)s be reduced, too? GOVERNMENT GROWS. Smaller government and deregulation were leitmotifs of the past era. The reregulation of the markets, the growing drain of Medicare and Social Security on the federal budget, and the threat of terrorism are expanding government once again. How Washington finances this expansion will be critical in the years ahead. INFLATION RETURNS. Disinflation defined the 1980s and '90s as interest rates fell. The opposite may be true for the next two decades. With China and India growing fast, Japan back in the game, and the U.S. surging again, global demand for oil and commodities will be strong. It doesn't mean that inflation will return to double-digit growth, as in the '70s. Technology and global competition should limit its impact. But if demand surges, things could get tricky. PRODUCTIVITY IS THE WILD CARD. Productivity appears to be rising to a new level. It's moved up to a 2 1/2% to 3% annual rate as people learn how to apply information technology. Productivity growth has averaged 3.6% annually over the past five years, compared with 2.4% a year for the past 15. If this continues, there will be more running room for the economy to grow, with corporate profits and wages rising nicely. If it doesn't, the economy will suffer. The next few months will be exciting, but the next few years will reveal the shape of America's -- and the world's -- growth trajectory. This is the time to watch the forest. 
BW MALL
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