THE DOW Jones Industrial Average plunged almost 600 points Monday; global markets recorded similar turbulence. There’s only so much uncertainty investors can tolerate before they panic, and uncertainty abounds in the world economy.
China is the biggest source of confusion, given its slowing growth, sudden exchange-rate shifts and collapsing, debt-fueled stock market. Markets also don’t quite know how to react to the Federal Reserve’s flirtation with an interest rate increase, which some would welcome as a sign of permanent U.S. recovery — but which others fear as the end of cheap money and the bull market it has fueled. Europe and Japan seem mired in intractable stagnation.
All of these short-term woes and worries are symptoms of a much deeper issue: namely, how to restore vigorous, sustainable economic growth. Since the onset of the “Great Recession” in late 2007, central banks have led the way in preventing a global depression. Not only the Fed but also its counterpart institutions in China, Japan and Europe have delivered emergency liquidity to prop up banks and rekindle at least a smidgen of job-creating economic activity.
Successful as central banks have been in fashioning short-term rescues, they have not been able to put global growth on a new and sounder long-term footing. That would require a rebalancing of global flows in money and goods. For nearly a generation, the United States and its debt-happy consumers have served as the world’s ultimate source of demand for finished goods, many provided by China, which in turn bought up the developing world’s raw materials. This de facto global system also hinged on the U.S. financial system’s ability to efficiently “recycle” the global glut of savings produced by the boom in Chinese and developing-world exports — and it all came crashing down in the Great Recession. Now what’s needed is for China (and the world’s other major surplus nation, Germany) to grow more based on their own internal demand and for the United States to grow more on the basis of exports.
Yet getting from here to there, through structural reform, is a task for political leaders, not technocratic central banks. To be sure, this is much more easily prescribed than done. Not even China, whose autocratic president, Xi Jinping, ostensibly rules with an iron hand, seems able to manage a long-promised shift to more consumption-led growth. Instead, Beijing flounders, fueling global instability.
For all the talk of its declining power, only the United States — still the world’s biggest economic and military power, issuer of the global reserve currency — could muster the clout and the credibility to lead the changes the world economy needs. Of course, that assumes Washington could conquer its own dysfunctionality long enough to articulate an effective and unified position.
President Obama and the Republican-led Congress need to take the news from markets seriously, as a reminder of how fragile the global recovery remains, and how vulnerable it is to any new shocks. It is now doubly important that they avoid market-churning drama over the federal debt ceiling and other budgetary deadlines looming this fall. Perhaps broader economic policymaking is beyond their capacity; surely, though, they can manage to do no harm.