There is a growing consensus: America is going into a marked slowdown, if not a downright recession. There will be a large gap between potential growth – usually estimated at 3 per cent to 4 per cent – and actual growth, meaning lost output of hundreds of billions of dollars. America actually faces three separate but related problems; a credit crunch, a debt crisis and a macroeconomic problem. A decade ago, America roundly criticised the countries of East Asia for their lack of transparency and inadequate regulation. But, as the old aphorism goes, people in glass houses shouldn’t throw stones.
The ongoing and deepening global financial crisis, nominally triggered in July 2007 by an event involving a small German bank holding securitized assets backed by USA sub-prime real estate mortgages, can best be understood as an essential part of an historical process dating back to the end of the Second World War—the rise and decline of the American Century.
As the threat of US-driven recession looms ever larger, it is state intervention that is keeping the market economy afloat. Last month, central banks coordinated action to pump billions into the global financial system in an effort to loosen the vice of the credit squeeze. This week, we have had the spectacle of state investment funds from South Korea, Singapore and Kuwait taking stakes in US corporate giants such as Citigroup, the world's largest bank, to offset the impact of the sub-prime mortgage crisis and the biggest loss in the bank's history.
There is growing talk on Wall Street about the possibility of a recession. Since the beginning of the year three Wall Street firms (Merrill Lynch, Morgan Stanley and Goldman Sachs) have all stated they believe we are either in a recession already or are very close to a recession. In other words, it's no longer a matter of if a recession happens but when it will happen and how long it will last. In response to these developments, various presidential candidates have proposed various solutions.
The United Nations has warned of "clear and present dangers" that the United States will take the world economy to a near standstill this year. As some of world finance's leading analysts predict a US recession this year, the world body says America's problems with housing credit and a weakening currency threaten to drag the world into an economic morass. In an annual report , the world body forecast global economic growth at 3.4 per cent for 2008, only slightly lower than last year, but said it could be as little as 1.6 per cent.
Gordon Brown says Britain should brace itself for the impact of global financial turbulence. The Financial Times warns that the outlook for the economy is the worst it's been since the dotcom bubble burst at the beginning of the decade. Retailers fear that the Boxing Day stampede to the sales was the last gasp for the consumer before a prolonged period of belt-tightening.
You might not have heard of N. Gregory Mankiw. The Harvard economics professor and former adviser to George W. Bush is one of the most gifted economists of our generation. He is also one of the most effective and talented propagandists of our times. His target: young economics students. His field of operation: the world’s universities. His weapon: the best selling textbook in the world.