Archive for August, 2005
Last February Brad Setser and I wrote a paper on the risks of an unraveling of the Bretton Woods II regime and of a disorderly adjustment of the global current account imbalances. Since then the US dollar has sharply rallied and US long term interest rates have remained relatively flat and low. To those with panglossian or benign views of the global imbalances and to supporters of view of the long term stability of the BW2 regime, the financial developments of the last few months appear as a proof that global imbalances are not something we need to worry about. I will instead make the case here that we need to seriously worry – even more than before - about such imbalances and the risks of their disorderly unraveling.
With oil prices recently rising above $65 dollars a barrel there is now a growing concern that the latest oil price spike may lead to a U.S. and global economic slowdown and perhaps even a recession. How likely is it that a recession will occur in 2006? The most surprising aspect of the increase in the price of oil in the last two years is that it has had little impact, so far, on U.S. growth and on inflation. The simple rule of thumb that a $10 a barrel increase in oil prices leads overtime to a fall in GDP growth of 0.4% has not materialized in the most recent oil shock episode. Indeed, one year ago Brad and I wrote a paper on the impact of the oil price shock on U.S. and global growth and expressed concerns about the, then already high, oil prices, while also discussing a number of reasons why the impact of the latest shock would be more limited than in past episodes. Since then oil prices have increased by another $20 a barrel with little effect on U.S. growth or inflation. Why and will this economic resilience to high oil prices continue?
A controversy is brewing over the question of whether World Bank loans should be made to middle income countries such as China that have international capital market access. Of course part of this controversy is pure sheer U.S. mercantilistic protectionism. National security hawks that were instrumental in sabotaging the CNOOC bid for Unocal based on far fetched national security arguments are now taking aim at World Bank loans to China making the really convoluted, concocted and incorrect argument that World Bank loans allow China to then buy U.S. assets galore and/or spend more on its military build-up.