Is the United States dragging the world toward recession?

The Financial Times published three stories yesterday that represent more bad news about the U.S. economy: the dollar is reaching new lows against the euro and a trade-weighted basket of currencies; the Federal Reserve is so concerned about U.S. growth that Chairman Ben Bernanke signaled there would be yet another rate cut in March, in ...

596242_current_issue_blog2.jpg
596242_current_issue_blog2.jpg

The Financial Times published three stories yesterday that represent more bad news about the U.S. economy: the dollar is reaching new lows against the euro and a trade-weighted basket of currencies; the Federal Reserve is so concerned about U.S. growth that Chairman Ben Bernanke signaled there would be yet another rate cut in March, in spite of inflation risks; and U.S. manufacturing data revealed that orders were the lowest in five months, and home sales reached a 13-year low. As Nouriel Roubini argues in the cover story of the latest issue of FP, this spells grave news -- not just for the United States, but for the rest of the world.

Roubini argues that the impending U.S. recession will cause global economic mayhem. He lays out five triggers that will form the roots of sharp economic downturn in countries around the world, if not a full-fledged global recession: a drop in trade, a weak dollar, the bursting of housing bubbles around the world, a fall in commodity prices, and a faltering of financial confidence.

From recent reports, Roubini's gloomy outlook looks increasingly prescient. It's too early to tell if trade is decreasing (the latest WTO figures are from 2006), but the factors that Roubini highlights will lead to that outcome are being realized. Output and demand is stagnant or falling, the dollar is sinking, and financial confidence is shaky. Housing markets in various countries continue to look precarious. Commodity prices are still rising, but this seems to be the effects of a weak dollar combined with a possible lag in demand signals.

The Financial Times published three stories yesterday that represent more bad news about the U.S. economy: the dollar is reaching new lows against the euro and a trade-weighted basket of currencies; the Federal Reserve is so concerned about U.S. growth that Chairman Ben Bernanke signaled there would be yet another rate cut in March, in spite of inflation risks; and U.S. manufacturing data revealed that orders were the lowest in five months, and home sales reached a 13-year low. As Nouriel Roubini argues in the cover story of the latest issue of FP, this spells grave news — not just for the United States, but for the rest of the world.

Roubini argues that the impending U.S. recession will cause global economic mayhem. He lays out five triggers that will form the roots of sharp economic downturn in countries around the world, if not a full-fledged global recession: a drop in trade, a weak dollar, the bursting of housing bubbles around the world, a fall in commodity prices, and a faltering of financial confidence.

From recent reports, Roubini’s gloomy outlook looks increasingly prescient. It’s too early to tell if trade is decreasing (the latest WTO figures are from 2006), but the factors that Roubini highlights will lead to that outcome are being realized. Output and demand is stagnant or falling, the dollar is sinking, and financial confidence is shaky. Housing markets in various countries continue to look precarious. Commodity prices are still rising, but this seems to be the effects of a weak dollar combined with a possible lag in demand signals.

Martin Wolf, the FT‘s chief economics commentator, recently urged readers to take Roubini’s warnings seriously. He draws a more hopeful conclusion about the Fed’s ability to come up with solutions than Roubini, but nonetheless, even the most optimistic analysts refuse to assert that the current financial crisis will not cause a great deal of pain. It will — and has. The question is: How bad will it get? And will the United States’ troubles infect the rest of the world?

Prerna Mankad is a researcher at Foreign Policy.

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