| Submit your comments on this article |
| Home Front: Economy |
| Is the Global Economy Unstable? |
| 2005-03-19 |
| Not a particularly deep or insightful piece, but the question is interesting. I would rephrase it as - Is the world economy inherently unstable? One of the big questions of our time is whether the global economy is stable. The gains from "globalization" -- more cross-border trade, investment and technology transfers -- are indisputable. Countless millions have escaped poverty in Asia and Europe. A recent study by the Institute for International Economics concluded that American living standards are roughly 10 percent higher as a result of globalization's benefits (cheap imports, greater competition, new technologies). Globalization's winners vastly outnumber its losers. Unfortunately, that could change if the world economy turns out to be unstable -- incapable of sustaining adequate growth or vulnerable to severe crises. For the moment the dangers are abstract. In 2004 the global economy grew 4.7 percent, economists at Goldman Sachs report. Asia (excluding Japan) grew 8.2 percent; Latin America, 5.6 percent; the United States, 4.4 percent. Global economic growth should average about 4 percent in 2005 and 2006, the Goldman economists predict. Still, the specter of instability lingers. Global economic integration -- the merging of markets, the mutual dependencies of countries -- has raced well ahead of either political integration or intellectual mastery. We simply don't understand well how the global economy operates. Nor is it clear how countries with diverging interests and shared suspicions will cooperate in a crisis. And there's the rub. One obvious problem is oil. Even if the United States could end dependence on imports for 64 percent of its oil demand (a practical impossibility anytime soon), Europe would still import 80 percent of its needs and Japan 100 percent. Any major shutdown of Persian Gulf exports -- from war, terrorism or a political act -- could devastate the world economy. Global terrorism or a world pandemic would also pose threats beyond the initial tragedies. Countries might try to protect themselves from outsiders -- imposing restrictions on trade, travel and immigration -- in ways that would destroy global commerce. And that is the risk. An economy that is dependent on factors beyond your political control. This is a completely different issue. At present the greatest peril may lie in huge global trade imbalances -- and the financial pressures they create. The basic dilemma is that the world needs American trade deficits as an "engine" of growth, compensating for weak growth in Europe and Japan. But the same trade deficits may now be destabilizing because they send large amounts of dollars abroad. The danger: a dollar "crash" on foreign exchange markets that spills over into the U.S. stock and bond markets, driving down those markets and triggering a global recession. Its moot whether a dollar crash would drive down US stock markets, its more likely to send them higher cos better export prospects and cheaper for foreigners to buy. Look at the numbers. In 2004 the U.S. current account deficit reached an estimated $650 billion, or a record 5.6 percent of gross domestic product. (The current account includes all trade, plus other international payments such as those generated by travel and tourism.) The mirror images of U.S. deficits are other countries' surpluses. In 2004 Japan's current account surplus was 3.7 percent of GDP, Germany's was 2.9 percent and China's was 2.3 percent, Economy.com estimates. But even with the stimulus of selling to the United States, economic growth in Europe and Japan has averaged only 2 percent and 1.5 percent annually since 1994. What's the problem? Foreign exporters receive dollars for what they ship to the United States. If those dollars aren't reinvested in American assets -- say, U.S. stocks, bonds or Treasury securities -- they'll be sold on foreign exchange markets for other currencies: the euro, the yen, the pound. As dollar sales drive down its value, foreigners note that their existing U.S. stocks and bonds are worth less in their own currencies. So they may sell U.S. securities to limit losses. At the end of 2003, foreigners owned $1.5 trillion in U.S. stocks; widespread sales could trigger steep market declines. The problem is compounding and will not go away. As foriegners accumulate US assets US dollars drain away not only from the trade imbalance but increasingly from interest and dividends. It has to break sometime. This is unavoidable. The risk is an economic implosion. A sinking stock market could damage American consumer confidence and spending. Higher currencies for Europe and Japan could weaken their export competitiveness. (A higher currency tends to make a country's exports more expensive and its imports cheaper.) Together, the United States, Europe and Japan are half the global economy. If they went into recession, other countries might follow. Economists are divided. Some fear the worst, because the world is flooded with dollars. Relax, say others. Asian central banks (their versions of the Federal Reserve) will buy surplus dollars, because they want to export to the United States and don't want their currencies to rise against the dollar. Still other economists (including Alan Greenspan) believe that we'll muddle through -- that shifts in exchange rates and economic growth will slowly narrow today's trade imbalances. So far the evidence supports everyone. Since mid-2001 the dollar has dropped against many currencies, especially the euro. Asian central banks have bought lots of dollars. And we have muddled through. Every economic system requires a political framework, but the framework for the global economy is creaky. Twenty years ago, the "world economy" consisted mainly of the United States and its Cold War allies. Economic, military and foreign policy objectives overlapped. Now the world economy includes China, India and the former Soviet Union. Global interdependence has inspired some cooperation -- the SARS outbreak and Asia's 1997-98 financial crisis being examples. But the political foundation for cooperation has weakened. Our relations with old Cold War allies are strained, while relations with new trading partners -- China especially -- are ambiguous. Could we someday be at war with China over Taiwan? Or will trade defuse conflict? The well-being of advanced nations presumes a smoothly operating global economy. We take this for granted without knowing whether it will always be true. We don't ask hard questions because we don't know the answers and fear what they might be. The article touches on it, but you can add into the mix dependence on unreliable or hostile states. The world may be reliant on oil from the ME but it is even more reliant on chips from East Asia. |
| Posted by:phil_b |
| #3 Especially the author. |
| Posted by: Sobiesky 2005-03-19 10:05:49 PM |
| #2 I'll summarize the author's complaint: "NOBODY'S IN CHARGE!" |
| Posted by: Ptah 2005-03-19 10:04:02 PM |
| #1 Well, and if it is unstable, there isn't much that can be done about it, is there? The system involved is only the aggregate of the entire human species, covering an area of just about the whole planet we occupy. The only option other than letting things happen is to go the controlled prices and production route, and small scale experience, ie on a national level, has shown that this leads to disaster fairly quickly. The best bet for responsible leadership to protect its people in such a situation is to educate the populace to the highest possible level, accustom them to acting within a situation of freedom and individual responsiblity, and encourage local companies to take advantage of the skills and attitude of their employees to innovate maximally developing improved products and processes, resulting in increased worldwide sales and profits. At least I think so... this rant is rapidly sliding into the realm of economics, a subject on which I am notoriously weak, |
| Posted by: trailing wife 2005-03-19 4:18:04 PM |