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The United States accounts for a fifth of global production. It is
the world’s single largest consumer market which spends more than
what the consumers of China and India combined spend. Morgan
Stanley Asia Chairman Stephen Roach estimates US yearly consumer
spending at $9.5 trillion, China $1 trillion, and India $650
million.
The US also buys 30 percent of total world
exports. Since China is now one of the world’s biggest exporters,
then it will certainly be hurt by a US slowdown. Since much on
Asia now depends on China, then the rest of Asia, including the
Philippines, will certainly suffer. How bad we will suffer is not
clear. Should the US stumble, Roach warns, the world would face
“the mother of all recessions.”
As a result of the US subprime mortgage crisis,
banks have become more strict with their lending, even to blue chip
companies. If large corporations have difficulty borrowing
money they will have difficulty expanding or even sustaining
existing operations. If they cut back, there will be layoffs.
If there are layoffs, consumers will spend less. If consumers
spend less, industries will sell less. It’s chain.
In Davos, the World Economic Forum conducted a
survey on the greatest threats to global growth. The top four
answers are: lack of coordinated response/leadership 18.5 percent;
mismanagement of the crisis 18.1 percent; broad-based collapse of
confidence 16.7 percent; and recession in the US 15.9 percent. In
three of the four, the US is the guilty party—leadership,
mismanagement and recession. Their weight is 52.5 percent.
The world is in crisis. Economically. And
the US is mainly to blame.
The financial slide began in the US in August
2007 with the dislocation of key credit markets and losses
associated with the subprime mortgage crisis. The situation has been
aggravated by soaring oil prices, the endless rise in commodity
prices (particularly of food, raising the specter of serious
shortages), a devaluing dollar, and massive losses by banks.
“The likelihood is more conservative lending,” predicts Jeffrey
Rosen, deputy chair, Lazard, USA.
The debate now, Professor Nouriel Roubini,
Roubini Global Economics USA, told the WEF session on economics on
January 23, is not whether the US will fall into recession, but how
severe it will be. He predicts a deep and prolonged decline, perhaps
lasting as long as a year. The Fed’s recent easing, while
necessary, comes too late to do more than make the recession
“slightly more shallow and less protracted” than otherwise, due
to the exhausted finances of US consumers and a severely stressed
banking system. A major downturn in the world’s largest economy
will inevitably result in a severe slowdown in growth—but probably
not an outright recession—in the rest of the world, Roubini
contends. Roach of Morgan Stanley Asia, shares Roubini’s
pessimism. He blames the US Fed. “What we have now are the
foreseeable consequences of bad economic management,” agrees
Joseph Stiglitz, a Nobel prizewinner and professor of economics at
Columbia. He traces the crisis to the White House tax
cuts in 2001 that encouraged Americans to take out mortgages they
could not pay. This was compounded by the Iraq War, soaring
oil prices, and over-consumption that wiped out US savings to zero
for the first time since the Depression.
By cutting interest rates in response to the
recent slump in equity prices, the Fed signaled that it regards its
primary job as defending the stock market, not managing the real
economy, Roach argues. “The Fed’s attitude is that they are here
to clean up after bubbles burst, not prevent them from happening in
the first place,” he complains. “This is a dangerous and
irresponsible and reckless way to run the world’s largest
economy.”
Hopes for a decoupling from the US are a
fantasy, Roach asserts. Like Roubini, he sees a prolonged global
slowdown, not a recession.
A US recession is a particularly difficult
policy challenge for China, according to Yu Yongding, director,
Institute of World Economics and Politics, Chinese Academy of Social
Sciences (CASS), China. The country must create at least 24 million
new jobs a year to keep up with population growth and the migration
of rural workers to the cities. But, inflationary pressures
are mounting.
Yu predicts policymakers in Beijing will
emphasize fighting inflation at the expense of growth. However,
those priorities could change if the US recession proves severe.
“It’s too late for 2008 if we rely on traditional monetary and
fiscal policy. But it’s not too late if we have a coordinated
response. We need out-of-the-box macroeconomic coordination and
out-of-the-box intervention in the US housing market.
The biggest problem is the lack of leadership in
the US,” says Laura D. Tyson, professor of business administration
and economics, University of California, Berkeley.
“There is a concern that oil will go up to
US$200 driven by geopolitical crises. This is intertwined with
concern about an outbreak of protectionism, which would disrupt
emerging economies. There is concern about mistrust in the US, which
resonates back to the anxiety over the lack of US leadership,”
winces C. Fred Bergsten, director, Peterson Institute for
International Economics.
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