The five challenges to the global economy
Fred Bergsten writes in the Economist about the five looming challenges to the global economy over the next few years: 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 ...
Fred Bergsten writes in the Economist about the five looming challenges to the global economy over the next few years:
Fred Bergsten writes in the Economist about the five looming challenges to the global economy over the next few years:
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.
Read the whole thing — and then check out John Williamson’s lucid lecture to the Chinese on the merits of various exchange rate regimes. One conclusion:
China is not a natural candidate for a fixed exchange rate against the dollar. It is not small, it does not trade predominantly with the United States, and it is not clear that it is prepared for the renunciation of sovereignty that a truly fixed rate implies. (But it does have an important national interest in avoiding sharp and arbitrary variations in its currency vis-à-vis those of its neighbors.)
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner
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