The American era is ending

Australia's geopolitical & economic positioning

Paul Keating

The world is about to enter the final phase of the third long economic wave of the 20th century. The first wave began in 1904 and lasted until 1929, ending with the Depression; the second ran from 1947 to 1974 ending with the OPEC oil shocks of that year. The wave we are now in, the one that began in 1982 has been overlaid by two business cycles, one from 1982 to 1990 the other from 1992 to 2000. We are about to go into the third leg which should last until around 2007 or with some luck, a bit later.

The good news is that this cycle should see synchronised global growth in 2004 with the United States, Europe and Asia all growing together for first time since 1999. The not so good news is that this third cycle will be less wealthy than the second one, the one which lasted from 1992 until 2000 and which brought with it huge lifts in stock market value.

Over the next half a dozen years, we are going to see people of my age fall out of the labour market in their droves. This will produce a profound tightening in the labour market. And will probably lead to strong increases in real wages. Unless productivity is there to pay for those increases, it will otherwise be paid for from profits. And if it is paid from profits, profits will be smashed, investment will fall. And a recession will ensue. The moment central banks around the world get a whiff of wage inflation, they will lift interest rates and the party will end as wage inflation bites into economic activity.

The only caveat I can see to this analysis is China. Before the rise of China, what happened in the industrial world was fundamentally the result of what happened in North America and Western Europe. What is happening in China today is without precedence in world history. Never before have we seen a billion-and-a-quarter people lifting themselves from poverty at such a pace.

The US will continue to be the world economic driver, but China will be a completely new factor - and there is just a chance that China will actually be a big enough influence to extend this third long economic wave. The more likely outcome, however, is that C