Lovely While It Lasts

(2 of 3)

"Overliquidity is killing everyone," Zhu said, estimating that the amount of money represented by these derivative financial instruments now totals an amount equivalent to eight times the entire world economy. "People have no idea of the risks they are taking."

Any assessment of the likely direction of the global economy is bound to turn on the near-term performance of its key driver: the U.S. And on that question, the panel was divided. Nouriel Roubini, professor of economics at New York University's Stern School of Business and chairman of New York City-based Roubini Global Economics, was the most pessimistic, predicting that the U.S. economy will perform far worse than most pundits, including the other panel members, expect this year.

Roubini thinks that the housing-market slowdown will continue, and he sees other signs of fragility that could bring a prolonged period of minimal growth between 0-1%. That would be a sharp deterioration from last year's 3.4%, according to Goldman Sachs, and, in turn, it would cause problems across the globe, since countries everywhere else are still, for now, dependent on the buying power of the U.S. consumer.

"Goldilocks is threatened by three bears," Roubini said — a housing recession, the beginning of a credit crunch and continued high oil prices. (He pointed out that, while it may be true that crude prices have fallen in the last few months, they are still high in historical terms.) Roubini was open in his use of language that others avoid: "I worry about a U.S. hard landing," he said. That forecast was vigorously contested by Frenkel, who pointed out that interest rates remain low by historical standards, unemployment is falling in the major industrialized countries, and profits are the highest in a decade. "I'm an optimist, but not sanguine," Frenkel said. While it's important to heed warnings, he maintained, the U.S. consumer engine that has driven growth worldwide "is still there."

Whoever ends up being right about this year's prospects for the U.S. economy, there was no dispute that the world is undergoing monumental shifts that will affect everyone, and in the not-sodistant future. Tyson described last year as "a landmark" because, as measured by purchasing power, emerging market economies for the first time overtook the developed world as a share of the global economy. But that rebalancing process still has a long way to go. Frenkel cited statistics showing that China and India together account for about 40% of the world's population but only 6% of world economic output. By contrast, the U.S., Japan and Western Europe make up 15% of the global population but account for 80% of its output. "There is a great gap, and it is going to be bridged over the next 20 years," he said. "We are going to see fundamental changes in the center of gravity and the center of power."

It's the job of panelist Montek Ahluwalia, deputy chairman of India's Planning Commission, to make sure that India contributes to closing that gap. India's economy grew by 8.3% in 2006 and, he said, "We're hoping to do better than that in 2007." Indeed, the nation is seeking to boost its growth rate to 10% annually over the next five years. The key ingredient for such a performance will be a big surge in investment, including in the nation's often dilapidated (or nonexistent) infrastructure such as roads and telecommunications. Such investment is needed. There is a growing consensus that poor infrastructure is a real impediment to India's chances of securing sustained fast growth. In China, too, the government is taking steps to ensure it can continue its strong momentum.

Among other measures, it last year sought to boost domestic demand and cool its export sector by raising export taxes and reducing import tariffs. Both countries still face considerable pressure to make further policy moves.

India's foreign partners and potential investors are pressing it to open its market to foreign goods and services more rapidly, while China is under pressure from Washington to revalue its currency more aggressively in order to reduce the yawning U.S. trade deficit.