The article in Economist talks about how the emerging economies are subsidizing the American consumer and giving rise to some economic paradoxes. Here are 3 paradoxes that I thought were interesting:
- America’s current-accout deficit is at a record high, yet the dollar has remained relatively strong
- Global interest rates are still historically low, despite strong growth and heavy government borrowing
- Oil prices have tripled since 2002, yet global growth remains robust and inflation, though rising, is still relatively low
The article argues that all of the above can be explained by the growing impact of emerging economies.
The 1st point about the dollar’s refusal to plunge and the low bond yields are partly due to the way the emerging economy countries have been piling up foreign reserves almost always denominated in the American dollar.
The 3rd point is driven by strong demand from developing countries rather than by an interruption of supply, so they have done less harm to global growth than in the past. The rise in oil prices and its impact on inflation has been offset by falling prices of goods exported by emerging economies… this is probably one of the shocks that is going to have huge global impact. I am positive that there will be case studies and scenarios described in Economics books. I am just glad we are here to see it and learn from it.
The above scenario keeps Central Banks, from raising interest rates as inflation is balanced by cheap goods and services produced by the emerging economies. This action by the Central Banks answers the 2 paradox.
I believe the phenomena is the second half of globalization, where some in the developed economies are hurt by the emerging economies… the concept of Creative Destruction was put forth in 1942, it is now happening to some of the jobs and industries in the developed economies.
Greg Mankiw has written about it here with a different perspective and Ed Sim has written about it here and I had a response to the post by Ed.