Don't worry, I am not refering to the tilt or the mass of the planet when I say that the world is imbalanced. Rather, I am referring to the increasing trade and economic imbalances in regards to spending and savings trends around the globe. According to Mr. Ernesto Zedillo (source: Forbes), "the world economy continues to look strong despite recent hiccups in international capital markets and the recalcitrance of high oil prices."
He goes on to mention that the world output (global GDP so to speak) will grow around 5%, with record low inflation worldwide. Good news right? Well, not so fast!
According to Zedillo's article, and several other analyst predictions, economists are increasingly worried about the possibility of a serious economic setback, if not this year then sometime in the not-so-distant future. The culprit at the root of the worry is what Zedillo describes as bouts of insomnia and divided opinions about a dismal situation called "global imbalance."
In our ever increasing global economic and political environment it is conceptually, and practically, feasible for economic circumstances, whether growth or distress, to spread quickly across increasingly interdependent global markets. A domino effect in the face of economic distress stemming from one region or from one economy of the world corrupting the strength of markets worldwide is an imminent economic possibiity. In fact, a similar domino effect was felt in the Asian Economic Crisis during the 1990's.
To complicate matters more, the global economy is more specialized and more interdependent across international borders than ever before. If present trends hold, the US current deficit--which reflects the country's excess of expenditure over income--could reach $900 billion in 2006 (source: Forbes), or 6.8% of GDP. How is this overspending being financed?
It's being financed by the equally unprecedented surpluses being run by other economies, most of which are in the Asia Pacific Region--led by China and Japan. This global imbalance of comsumption and cheap external financing is a reason for concern for many US analysts and economists. Current global economic conditions are credited greatly for fueling this imbalance. Higher productivity in the US has given Americans both a revaluation of their assets and an expectation for higher future income. This in-turn encourages increased spending beyond current means.
At the same time, higher productivity in the US, and reluctance of some major European countries to reform their economies, had made the American economy a more attractive dumping bed of foreigners to invest thier current account surpluses.
Hopefully you can guage from these trends that the global economy is very circular and potentially very fragile. So the next time you decide to purchase that luxury item produced in China, or Chile, or Canada on credit, think about who is really lending you the money to buy on credit. Will you be able to make your credit card payments if the economy suddenly slowed and you lost your job? How much of a savings buffer do you think you'll need to keep your car, your house or apartment, pay for utilities and other essentials, and also cover you current credit card balance if you were out of a job for six months?
