Sunday, September 19, 2004

Five major risks threaten the world economy. Three center on the United States: renewed sharp increases in the current account deficit leading to a crash of the dollar, a budget profile that is out of control, and an outbreak of trade protectionism. A fourth relates to China, which faces a possible hard landing from its recent overheating. The fifth is that oil prices could rise to $60 to $70 per barrel even without a major political or terrorist disruption, and much higher with one.

Most of these risks reinforce each other. A further oil shock, a dollar collapse, and a soaring American budget deficit would all generate much higher inflation and interest rates. A sharp dollar decline would increase the likelihood of further oil price rises. Larger budget deficits will produce larger American trade deficits, and thus more protectionism and dollar vulnerability. Realization of any one of the five risks could substantially reduce world growth. If two or three, let alone all five, were to occur in combination then they would radically reverse the global outlook.

There is still time to head off each of these risks. Decisions made in America immediately after this year's elections will be pivotal. China, the new growth locomotive, is key to resolving the global trade imbalances and must play a central role in future. Action by a number of other countries will be essential to maintain global growth and to avoid deeper oil shocks and new trade restrictions.

This is a great article - but the comment discussion on Daniel Drezner's blog post linking to it makes some good points.

Bergsten neglects a large and important aspect of China's economy, the great gap between the people prospering from its economic boom and those who are not. This latter group numbers more than the entire population of the United States; dread of a slowdown in export-driven growth -- and a consequent drying up of a major source of jobs for Chinese workers -- is most likely why the Chinese government has been so reluctant to adjust its unrealistic exchange rate.

posted by: Zathras on 09.16.04 at 11:00 PM [permalink]

In fact, most of the suggestions are good ideas that have been thought of and run into various political obstacles. A few may be bad ideas which have met a well deserved grave. Maybe a few have potential with some work. But the article talks about many things that could be done - but none of the reasons they haven't.

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