> Marvin wrote:
>
>> There's little evidence to suggest that China and
>> other countries would be immune to a severe US
>> depression...
> Even in highly interdependent and complex systems, each part has its
> own dynamics. They don't all just move in tandem. So, yes, the world
> economy has become more interdependent and complex, but the BRICs
> (Brazil, Russia, India, and China) have economic structures different
> from those of the U.S. or the EU. To mention one thing, if China and
> India continue to build their industrial infrastructure (and they have
> the resources to undertake this), commodity prices may remain high.
> And, as a result, commodity exporting countries may stay in the game
> for longer. That could contribute to shift economic power. In any
> case, it's not far-fetched to think that the BRICs may have now what
> is needed to keep themselves from being dragged down by the U.S. and
> EU economies.
>
> That said, the case for the relative decline of the U.S. in the world
> economy goes beyond the decoupling of business cycles. It is based on
> more fundamental trends -- e.g. globalization-driven convergence,
> demographics, culture, technology, and broader shifts in the
> distribution of global (human and physical) wealth.
===========================
I agree with Julio's last point that a rebalacing of the global economy -
marked in particular by the relative decline of the US (and rise of China) -
is an ongoing structural process independent of the economic conjucture.
That was the nub of my objection to Patrick's enthusiasm for a deep
depression, which I saw as unseemly in any case in view of the human misery
which follows on these events. It's true a deepening crisis would accelerate
the shift in capitalist power relations, as Patrick argues, but I can't get
too excited about that, nor do I share Patrick and Chuck's certainty about
the positive social changes would result. The most we can say with any
degree of assurance is that politics in all countries would become more
polarized, but we can't know the outcome.
As to Julio's point about the BRICs being able to carry on, I suppose that will depend on the whether the American downturn is relatively brief and shallow or, as appears increasingly likely, extended or severe. It's hard to imagine that the high commodity prices which have supported growth in Russia and Brazil and the outsourcing of manufacturing and services by foreign multinationals into China and India which have driven growth in these countries would not be vulnerable to a serious slowdown in the core capitalist countries. None of these rapidly growing economies yet have the domestic demand to pick up the slack, although a sharp curtailment of incoming FDI and exports would provide the impetus to more urgently reorient their economies in this direction.
Meanwhile, confidence in the decoupling thesis has been eroding apace with confidence that the US would either avoid or experience only a mild recession. The piece below, by way of illustration, is from a couple of months ago, when the anxiety level was still not as high as it is today.
* * *
Maybe the Globe Isn't Immune To Slowing U.S.
Doubts Spread on View That Europe and Asia Will Pick Up the Slack
By JUSTIN LAHART Wall Street Journal November 28, 2007; Page C1
With worries over the fallout from the housing and credit markets deepening, the once-widespread view that Europe and Asia would pick up the slack and shield the global economy from the effects of a U.S. downturn is being put to the test.
Investors embraced the idea, shuttling money abroad and buying shares of companies with big overseas operations, like Wm. Wrigley Jr. Co. and 3M Co. -- until disappointing results from both sent their shares down. Technology companies, which as a group have the largest overseas-sales exposure, were another popular destination. After weathering the initial stages of the stock-market selloff in October, they have fallen sharply this month.
Less than two months ago, the International Monetary Fund offered a remarkably upbeat view that global economic growth would slow down just a smidge to 4.8% next year from an estimated 5.2% this year. But that no longer seems certain.
"It's quite clear that the downside risks to world growth have increased since we met about a month ago at the IMF," the governor of the Canadian central bank, David Dodge, said recently.
House prices have continued to fall in the U.S. and elsewhere, banks in the U.S. and Europe have announced billions of dollars in mortgage-related losses, stocks around the world have fallen sharply and an unrelenting reluctance by banks to lend -- even to one another -- has prompted the Federal Reserve and European Central Bank to act.
The notion that the rest of the world has "decoupled" from the U.S. came into vogue earlier this year, as overseas economies -- particularly emerging markets -- continued to post robust growth and Europe and Japan appeared to be enjoying a long-delayed upturn.
Policy makers joined the decoupling parade. In the spring, the IMF included a chapter in its April World Economic Outlook called "Decoupling the Train." The gist: The current weakness of the U.S. economy stems largely from housing woes -- and housing is less global than, say, computers and other parts of the U.S. economy. That is good news for the rest of the world.
But the U.S. is now flirting with something more severe than a mere slowdown. That -- along with rising oil prices and the specter of a global credit crunch -- is changing the picture.
Europe is showing signs of faltering, while Japan may be at risk of sliding back into recession. While developing economies like China are still on a steady boil, recent drops in their stock markets suggest investors are beginning to doubt their immunity to a U.S.-led slowdown.
"We're seeing a bond market in the U.S. which is pricing in a very high chance of a recession and yet is refusing to price in any significant chance of monetary easing in the euro area," says Jacques Cailloux, chief euro-area economist with Royal Bank of Scotland.
"So I do think the market is betting, to some extent, on the decoupling," he says. "But I think it's the wrong bet."
Recent data show the euro-zone economy has been resilient, so far, with gross domestic product rising 2.6% in the third quarter, compared with last year. German and French business confidence staged surprising rebounds this month, according to data released yesterday, with German exporters notably optimistic, despite the euro's flirtation with $1.50.
The combination of a U.S. slowdown, the stronger euro and continuing credit-market turmoil is likely to damp growth in the fourth quarter and through next year. Once-hot housing markets in Spain and Ireland are slowing. Last week, the British Bankers' Association said United Kingdom mortgage approvals fell sharply in October.
Canadian door maker Masonite International Corp. saw demand in the U.K. and France soften in the third quarter. "Although we do not expect a major downturn in Europe like we are experiencing in North America, these markets could be materially less robust in the last quarter of 2007 and into 2008," Chief Executive Officer Fred Lynch said earlier this month.
Weinig Group, a German machine-tool maker typical of midsize export-oriented companies, says new orders from China have begun to slow sharply. "Many of our Chinese customers sell their products in North America, and they are growing more slowly or not at all. That hurts their appetite for investment," says Rainer Hundsdörfer, Weinig's CEO. Other Chinese customers, which make fittings for the domestic market, are still buying machines, he says. Weinig's orders from Latin America have also begun to slow, for the same reason: Many manufacturers there rely on exports of finished goods to the U.S.
Demand from Europe, especially Eastern Europe, is helping to compensate. Demand in oil-producing countries also remains strong. "If the U.S. economy went into recession, Asia would be most affected, but the rest of the world could largely carry on," Mr. Hundsdörfer predicts.
"Europe is in more serious danger of a slowdown than many people think," says Simon Johnson, chief IMF economist. "If the U.S. slows down and Europe slows down, that affects trade...and there are no amount of reserves an emerging market can have that protects against markets drying up."
The global economy, he says, now faces the potential for a late-20th-century-style spike in oil prices, a 21st-century global financial shock -- and an old-fashioned 19th-century-style slowdown in global trade.
That could put Japan, in particular, at risk. Despite an expansion that has lasted nearly six years, and despite policy makers' efforts to boost domestic demand, the country remains overly dependent on exports, says Lehman Brothers global economist Paul Sheard.While the risks to other Asian economies don't seem as stark as in Japan, investors have been selling shares. The decline in the Seoul stock market, which has fallen 10% this month, is especially notable: Because South Korean companies are export-oriented and carry heavy debt loads, they are seen as particularly sensitive to changes in global growth and the global availability of credit.
Another sign that global growth may be slipping, according to Christopher Wood, a Hong Kong-based analyst for CLSA Group, is a drop in global shipping rates. After more than doubling earlier this year, the Baltic Exchange Dry Index, which reflects rates to transport bulk commodities such as coal, iron ore and grains, has fallen by 10% over the past two weeks.