The big economic issue is when the world will decide that the US's consumption of the world's savings will stop. America essentially bought the world out of a recession in the last few years with its ongoing credit card consumption of consumer goods. The US has a large and constantly widening Current Account Deficit, it also has a huge amount of public debt, nearly 7.2 trillion from an 11 trillion economy. The United States also consumes 80% of the world's savings to maintain this. Is this so unsustainable it will lead to a crash, or will the let down be slow and even?

Benign to Crash

The Economist's "The World in 2005" is remarkably upbeat about the economic prospects of the globe in 2005 despite a recognition that the world economy will slow. Daniel Franklin writes;

True, the world economy will slow, after growing in 2004 at its fastest pace for more than 20 years, as interest rates rise in America and as China applies the brakes. There is a chance that the slowdown will be nasty; brutal and bumpy. More likely, it will be boringly benign - leaving worriers to focus on the world's other potential sources of instability.

There seems little doubt that the insatiable American desire for credit is unsustainable, even if Franklin didn't mention it. John Quiggin commented on the imbalance of trade the US is undergoing where the New York docks are unloading containers of Chinese goods, and then loading the ships with scrap metal and paper for the return journey;

Even on the most generous interpretation of comparative advantage, I don't think returning packaging material and scrap to your suppliers can form a sustainable basis for trade.

It appears that America's factories are no longer in Detroit or Indiana, they are now in China. In times past Ohio, Illinois and Indiana were the cheap parts of the US were manufacturing was viable. No more; Ohio is having all sorts of issues - a crumbling school system and young educated workers leaving for better opportunities in locations such as Boston, Northern Virginia and other high tech economies.

High Interest Rates, Inflation or Crash?

The US public debt can be decreased by increasing inflation, as this will reduce the value of the debt. The American private consumption of credit can be decreased by increasing the cost of money - through higher interest rates. The other possibility is some bubble or instability arising from America's situation - something unforeseen in the same manner that "Contagion" was. Peter Hartcher writes ;

Much more potent is the emerging danger to the economy. There is an eerie phenomenon in world markets at the moment. Typically, markets demand that risky corporate borrowers pay about six percentage points more than the US Treasury when they borrow on the bond market. That spread has halved to about three percentage points today. What does this mean? "Markets are pricing that this is a low-risk world, that everything is going to unfold perfectly," says a Goldman Sachs economist, Ken Courtis.

And Professor Warwick McKibbin of the Australian National University and a member of the Reserve Bank board, explains why this is eerie: "This is exactly what happened in the run-up to all the major crises of the last decade - the Asia crisis, the long-term capital management crisis, the Russian crisis. You have to wonder what's coming next."

Since Australia has an American like current account deficit and a great deal of private debt - though thankfully little public debt - the Australian economy will suffer to an increase in the cost of money. If America has economic difficulties, its economy is so large, that the rest of the world will feel America's pain as well. Will the change be benign and boring, or will it be brutal and nasty? Given the last question, maybe Spike Milligan should have the last word;

Money can't buy you happiness, but it does bring you a more pleasant form of misery.

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