This recent commentary on world market vulnerabilities as US economy slows down is a good read on macro vulnerabilities.
If a U.S. slowdown is not the issue (but rather the extent of it), the next most crucial and important issue becomes whether the rest of the world will de-couple from the U.S. slowdown or not, i.e. whether Europe, China, Japan and other emerging market economies will be able to continue to grow at a sustained rate if the U.S. economy slows down or whether the U.S. slowdown will drag the rest of the world into a sharp global growth deceleration.
The bullet point summary of these 12 anti-decoupling arguments.
1.Trade links are important in transmitting shocks from the US to the rest of the world.
2.The oil and commodity price shock is a shock that is common to the US and many other oil and commodity importing countries.
3.Monetary policy will be tightened in the US and many other economies given global concerns about rising inflation. The era of cheap liquidity is over
4.Housing bubbles are bursting - or flattening - not just in the US but in many other economies as easy liquidity had led to housing bubbles in many parts of the world.
5.The recent fall in equity prices is not just US based; it is rather global and more severe in the rest of the world than in the US; it will thus have negative effects on global consumption and investment spending and on business and consumer confidence in many economies.
6.The weakening of the US dollar following the US slowdown is leading to the appreciation of the Euro, Yen and other floating currencies. Given the tentative recovery of the Eurozone and Japan, this appreciation will hurt net exports and growth.
7.Foreign direct investment (FDI) is another channel of transmission: when the US slows down the sales in the US of US-producing affiliates and subsidiaries of foreign firms fall, negatively affecting the profits of such firms in their home base in Japan, Europe and around the world.
8.Risk aversion is rising globally and the downturn in markets is negatively affecting "animal spirits", i.e. business and consumer confidence.
9. The US and G7 slowdown will have negative growth and financial effects on emerging market economies that, until recently, had widely benefitted from high global growth, high commodity prices and low global interest rates. Lower global growth, lower commodity prices and reduced global liquidity will have negative effects of the real economies of emerging markets, as the recent sharp market selloff in these markets is already signaling.
10. The last four global recessions have been characterized by an oil shock and an inflation scare that led to monetary tightening and stagflationary outcomes. The same is happening this time around and global business cycles are highly correlated.
11. There is now a serious risk of a systemic financial crisis - as in the 1987 stock market crash or the 1998 LTCM near collapse. The factors that led to systemic risk in previous episodes of systemic financial distress are present again today.
12. Unlike the 2001 global downturn there is little room for monetary and fiscal policies to be eased to deal with the global slowdown; while exchange rates are now a zero sum game as, in a slowdown, most G7 economies will want to avoid an appreciaton of their currencies. Thus, the risks of trade and asset protectionism are rising in a global economy with large and increasing global imbalances and geostrategic risks.
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