Carnegie Endowment for International Peace
A new worldwide monetary contraction could reverse many of the advances in globalization that the international community takes for granted.
The current cycle of globalization could end in a painful period of debt adjustment and payment imbalances across the globe, with a likely slowdown of growth in China, a possible abandonment of the euro, and the risk of increasing U.S. protectionism.
Ineffectual loan quotas have led Chinese banks to devise new, riskier lending mechanisms. This trend will continue as long as China maintains its loose monetary and credit policies.
Chinese growth may continue at a rapid pace this year, but a growing liquidity-induced bubble will eventually require major reforms.
Although an appreciation in China's currency value could benefit the United States in theory, Chinese leaders would likely counterbalance such a rise with policies that could further damage both the Chinese and U.S. economies.
Although China's growth next year is likely to remain high, expectations for China's average growth over the next decade are being revised downward.
European economic adjustment will be both economically and politically painful, but Europe's financial crises will continue to recur until real fundamental rebalancing occurs.
China's interest rate hikes are primarily intended to rebalance China's overheated investment sector, but they will likely have little effect on the country's rising inflation.
Europe's debt crises are likely to worsen, requiring many European countries to implement difficult long-term economic and political adjustments to recover from their fiscal woes.
Although the U.S. Federal Reserve's recent quantitative easing is a necessary step, it makes China even less likely to embrace Secretary Geithner's proposal to limit current account surpluses.
An international agreement to limit current account surpluses would be a productive step toward global economic rebalancing, but in order to decrease its trade deficit, the United States must also enact domestic reform.
The Chinese central bank's decision to raise interest rates is a positive step toward economic rebalancing, but it needs to be followed up by larger rate hikes if China is to increase domestic consumption.
In order to sustain economic growth during its transition toward a more balanced economy and help keep U.S. demand for Chinese exports high, Beijing should invest in the U.S. transportation infrastructure.
China will likely expand access to cheap credit even as it revalues its currency in the coming months, counterbalancing the effects of revaluation and further exacerbating China's economic imbalances.
Political concerns will dominate Beijing's economic decision-making as Chinese leaders seek a gradual adjustment that will balance competing constituencies.
The only way to sustainably increase Chinese domestic consumption is to bolster the share of national income belonging to households by transitioning away from the Asian development model that led to Japan’s economic decline.
There is still a great deal of uncertainty regarding the current debt crisis, since there is no simple way to determine whether a country will default and the necessary major global adjustments have not yet taken place.
Rising inflation rates will likely trigger a decline in real interest rates, further decreasing the cost of capital and worsening the imbalance between China’s national GDP and average household income.
Shanghai’s markets will go up and down, but they are not driven by investor evaluation of long-term growth prospects. China does not yet posses the tools to make such evaluation useful, so be careful about reading too much into the stock market numbers.
The Euro crisis, rather than reducing the urgency for China to revalue its currency and adjust its trade policy, may in fact require that China react much more aggressively than originally planned.
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