The Knife’s-Edge Economy

The fact that the US has not slid into a full-blown recession proves that the late Rudi Dornbusch was right that macroeconomic imbalances can last for longer than economists believe possible. But, given the magnitude of the chaos on the financial side of the US economy, widespread nationalization and liquidations are inevitable if confidence is not restored soon.

Berkeley – Since 2003, I have been saying that the global economy is badly unbalanced and vulnerable to a macroeconomic catastrophe that would yield one of the worst episodes of economic distress of modern times. Since 2004, I have been saying that the situation, once it started, would probably become clear within a year: we would know whether the global economy would right itself or begin a downward spiral. In 2004-2007, I considered that I might be wrong about a relatively rapid resolution to the world’s economic distress: as the late Rudi Dornbusch put it, unsustainable macroeconomic imbalances can sustain themselves longer than economists (with their touching faith in rational human decision making) believe is possible.

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