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What’s next for the world economy?

15/2/2016

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Written by Samuel Rines, The National Interest
PictureThe Chinese and U.S. economies are changing—but it’s too soon to call it a ‘new normal.
While markets are having a shaky start to 2016, the chatter of commentators proclaiming the ‘new normal’ at which the global economy has supposedly arrived has been steady. It is true that the economic framework for the United States, and the trajectory of the global economy, is different than that experienced over the past few decades, but it is also far too soon to form a complete picture of what that ‘new normal’ looks like... ...


​Of course, how the world got to this moment is a much clearer. The now ‘old’ normal was defined by an aggressively growing China and a monetarily loose U.S. Federal Reserve. The two were intertwined to a degree: the Fed was reacting to the deflationary pressures brought on by the reduction in manufacturing employment, and China was encouraging a surge in its manufacturing base. Meanwhile, the emerging world—largely reliant on commodity exports—was benefiting on all sides: a weak dollar inflated global commodity prices while surging Chinese demand worked to push prices higher as well. This ‘dual stimulus’ propelled the world through the beginning of the twenty-first century.
​The financial crisis brought this to a crescendo of sorts. Yes, the Fed had raised interest rates, but it was too late to avoid a commodity bubble. In response to the collapse, China undertook a massive stimulus program, that effectively bailed out its commodity trading partners, so much so that Australia and Canada were largely insulated from the worst of the global downturn.
​The dual stimulus set the stage for the ‘normal’ of the beginning of the twenty-first century—the awkward interaction of a booming global economy and a transitioning U.S. economy. As manufacturing jobs were off-shored and then automated, the U.S. economy found ways to cope. First, it utilized the housing boom, and then the shale oil and gas revolution—both of which required the highly paid, low-skilled labor critical to inflating America’s bubbles. Now that the bubbles have popped, the question lingers as to where the next low-skill employment boom will occur.
http://nationalinterest.org/feature/whats-next-the-world-economy-14820
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