Lovely While It Lasts

Here's a piece of advice for those of you fretting about the economy: enjoy the good times while they last. Growth in the U.S. has slowed, the price of oil and other commodities is yo-yoing, and scary geopolitical risks abound, from Iraq to North Korea . But, at least for the next year, global growth is sufficiently strong that it should be able to withstandmany of these challenges easily. If you insist on worrying, however, there's plenty to agonize over. A number of longterm economic and social issues could bring trouble, ranging from too much money sloshing around the world's financial systems to rising protectionist pressures in the U.S. and Europe, as the middle classes there feel squeezed by global competition.

That mixture of short-term optimism tempered by longer-term worries emerged from a vibrant discussion of Time's Board of Economists at the World Economic Forum in Davos, Switzerland, on Jan. 24. Four of the five panelists agreed with the forecast that 2007 is likely to be "another Goldilocks year" made by Laura D. Tyson, a former chairman of the White House's Council of Economic Advisers, who has just left her position as dean of the London Business School to return as a professor to the University of California, Berkeley's Haas Business School. The world economy, the four concurred, seems set to continue its virtually ideal — not too hot, not too cold — performance. While the U.S. is slowing, Europe and Japan will continue performing solidly, and there's no sign of any letup in the torrid pace of growth in emerging markets. China, the economic marvel of the world, continues to expand at around 10% a year. Even if there are some unexpected setbacks, said Jacob A. Frenkel, vice chairman of insurer American International Group, financial markets are now "so wide and so deep" that they will help to absorb the shocks. "In a fundamental sense," he added, "we are immune to bad policies."

But even if this upbeat scenario does come true, 2007 will also go down in history as a year of transition, in the phrase of Zhu Min, vice president of the Bank of China. High among his worries for the future are growing imbalances in the structure of the world economy, as Asia produces ever more of the goods that the U.S. consumes, and ends up investing ever more of the proceeds in U.S. government debt.

These lopsided trade and financial flows are particularly acute between China and the U.S.: China's central bank currently holds $1 trillion in reserves, and that amount will probably swell by another $200 billion this year. "I am more and more convinced that we'll have a much tougher situation in the coming years," Zhu said, uneasy that policymakers around the globe have not yet begun addressing critical structural issues. Top of his wish list: some action by the U.S. to end its consumer-spending binge and encourage saving. As a banker, Zhu is also concerned about an explosion of complex and potentially perilous new instruments in financial markets, as hedge funds and many others leverage their investments worldwide.