Uncertainty Shifts to China
As long as imbalances of world trade and capital flows unwind slowly and smoothly, the magnitude of global economic distress should be relatively small. However, under two plausible scenarios – both concerning China – the unwinding of global imbalances could cause regional if not global depression.
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Now that the dollar has dropped 43% from its high against the euro, the process of global financial rebalancing is seriously underway. The United States’ trade and current account deficits have begun to shrink relative to American and world GDP. Asian current account surpluses are about to start to shrink as well, especially if growth slows markedly in America in the aftermath of the end of its housing boom.