Most economic talk nowadays concerns the depth of the world recession. Is an upturn just around the corner? Will it occur in the second quarter of next year and be V-shaped? Or should we begin to prepare for a worst-case scenario with much of next year spent in the doldrums and not only the US but also Europe in recession?
There are good reasons to be confident that monetary and fiscal policy will, in the end, deliver us from today's troubles. Indeed, the current downturn will probably be far milder than that of the 1982 recession, which was the worst since the 1930s. In all this worrying about the global economy, we are giving short shrift to the most serious risks to the world's economic health: the fall of the Saudi royal family and a possible Japanese financial meltdown. Both could happen any day; either would be enough to shock world prosperity in ways far more painful than what is happening now.
ILLUSTRATION: YU SHA
Starting with oil: today, with the world in recession, falling oil prices are a welcome offset to the slump. They add money to consumer's pockets and lower inflation, making central banks more willing to cut interest rates and stimulate demand. View this from the oil producing side, however, and the darkness becomes visible.
In a recent issue of the New Yorker magazine, Seymour Hersh documented the waning legitimacy of the Saudi royal family. The royals have lost the support of the conservative Islamic community and have even been declared infidel by some clerics. If it were not for its role as protector of Mecca and Medina, the House of Saud would appear as little more than a royal family with 5000 princes, many of whom appear to spend their lives whoring and boozing.
George Perry of the Brookings Institution has developed various scenarios that predict the impact of a serious contraction of oil supplies. These span the spectrum from a mere disruption to a lasting reduction. With good economics and without drama, he finds that a contraction of 1 million barrels per day would raise prices to US$32 per barrel; an extreme cut of 7.5 million barrels -- a cut equal to 10 percent of world production -- would increase the price of a barrel to US$161. Such a price hike would incite the worst recession in the last 50 years. While there would certainly be geopolitical responses, the world would be in deep trouble for years even if oil started flowing again.
The second global mega-risk is a Japanese financial meltdown. This, too, is something that may happen any day now or that could be a few years off. Two ingredients are at work here: an economy that refuses to turn up (with no one inside or outside Japan having a clue as to how to change that) and an ailing financial superstructure. Not only are Japan's banks in trouble, but also its insurance companies, retailers, and other parts of the private sector are barely keeping their heads above water.
Most importantly, Japan's government is bankrupt. Its debt is larger than that of the US or Europe, which both represent much larger economies than Japan's. Growing your way out of debt is the usual answer for such a condition. Instead, Japan's economy keeps shrinking.
Japan's finances will remain stable only as long as Japanese households support the status quo by rolling over their holdings of government debt or by buying even more in the mistaken belief that such bonds remain plausible investments. Having seen their investments in stocks be destroyed by the collapse of the bubble 10 years ago, it is not surprising that individual Japanese hang on to their government's liabilities as a last remaining hope.
This is dangerous. One day there will be a creditors' strike. Investors will take flight into foreign assets as in any delinquent emerging market, and this will send the yen into a tailspin. When a currency crashes in this way, debt crashes and confidence falls, dragging consumption down with it. Overnight, Japan could descend into a new Great Depression.
If Japan goes under, much of Asia will also collapse. Instead of being bottled up in Japan, the economic shock will spread like a tidal wave, just as the New York collapse of 1929 did. Policy responses to such economic shocks may be better nowadays than they were during the Great Depression -- for example, we know not to embark on a trade war should the yen crash -- but no one knows how long and painful the process of correction will be.
A moment of enlightenment might arise in Saudi Arabia so that, in a nick of time, stable government is restored, and it is conceivable that some inflationary strategy might get Japan off the hook before midnight strikes. But it is the nature of economics that when rot sets in so deeply, damage control often opens the door to utter collapse, as with Gorbachev's reforms in the Soviet Union.
Doomsayers forever talk about political risk in the Middle East and financial risk in Japan. Neither has yet occurred. But even the most hopeful observer must now concede that these dark scenarios are moving toward realization and that no good prevention strategy is in place. No IMF intervention or Gulf War to preserve the Saudi throne will be sufficient if either scenario moves from nightmare prospect to reality.
Rudi Dornbusch is Ford professor of economics at MIT and a former chief economic advisor to both the World Bank and IMF.
Copyright: Project Syndicate
With escalating US-China competition and mutual distrust, the trend of supply chain “friend shoring” in the wake of the COVID-19 pandemic and the fragmentation of the world into rival geopolitical blocs, many analysts and policymakers worry the world is retreating into a new cold war — a world of trade bifurcation, protectionism and deglobalization. The world is in a new cold war, said Robin Niblett, former director of the London-based think tank Chatham House. Niblett said he sees the US and China slowly reaching a modus vivendi, but it might take time. The two great powers appear to be “reversing carefully
As China steps up a campaign to diplomatically isolate and squeeze Taiwan, it has become more imperative than ever that Taipei play a greater role internationally with the support of the democratic world. To help safeguard its autonomous status, Taiwan needs to go beyond bolstering its defenses with weapons like anti-ship and anti-aircraft missiles. With the help of its international backers, it must also expand its diplomatic footprint globally. But are Taiwan’s foreign friends willing to translate their rhetoric into action by helping Taipei carve out more international space for itself? Beating back China’s effort to turn Taiwan into an international pariah
Typhoon Krathon made landfall in southwestern Taiwan last week, bringing strong winds, heavy rain and flooding, cutting power to more than 170,000 homes and water supply to more than 400,000 homes, and leading to more than 600 injuries and four deaths. Due to the typhoon, schools and offices across the nation were ordered to close for two to four days, stirring up familiar controversies over whether local governments’ decisions to call typhoon days were appropriate. The typhoon’s center made landfall in Kaohsiung’s Siaogang District (小港) at noon on Thursday, but it weakened into a tropical depression early on Friday, and its structure
Since the end of the Cold War, the US-China espionage battle has arguably become the largest on Earth. Spying on China is vital for the US, as China’s growing military and technological capabilities pose direct challenges to its interests, especially in defending Taiwan and maintaining security in the Indo-Pacific. Intelligence gathering helps the US counter Chinese aggression, stay ahead of threats and safeguard not only its own security, but also the stability of global trade routes. Unchecked Chinese expansion could destabilize the region and have far-reaching global consequences. In recent years, spying on China has become increasingly difficult for the US
RSS