The U.S. government is now facing a new round of financial upheavals as the sub-prime mortgage crisis has unfolded and spread to much more extensive spheres. Due to a steady shrinkage of housing loans, consumption loans, municipal utility bonds, corporate bonds and other financial assets, a large number of financial institutions and local government finances in the United States would possibly go bankrupt and social fundraising would become more difficult.
So the financial setup, the core of the American economic operation, has to be revamped. Numerous economists deem that the U.S. is currently facing a gravest financial crisis after the Great Depression of 1929, and the possible worst scene is yet to arrive, and the U.S. economy is full of risks in the year ahead.
Meanwhile, the high prices of oil, cereals and other (storable) commodities in large quantities remain at super high levels on the world market. Global food prices have risen by an average of 50 percent in the past 12 months, including an 80-percent jump in the prices of cereals, according to relevant figures provided by the UN Food and Agricultural Organization (FAO). And global oil prices have gone up 100 percent in the past year and more, far outreaching the expectation of most economists.
Of the varied causes appearing at the same time at the emergence of the above-mentioned manifold economic crises, there are two foundamental factors. One is the general, overall heat of the global economy, and the other its structural imbalances. In the past decade, a golden era of faster global economic growth, both developing nations and developed countries had undergone a fairly high economic growth. This is attributable to the setup retooling of new-emerging market economies and an ensuing progress in labor productivity and to the over-consumption in the U.S. caused by the financial market bubble as well.
The U.S., which has the world's largest economy, poses the "locomotive engine" of global economic growth. Over-consumption has not only brought a high growth to its economy, but at the same time created a huge external demand for new-emerging economies, which could attain a motive force for the high input and high growth rate.
In the last 10-plus years, there were intensified structural twists in the global economy, manifested chiefly in trade imbalances in the U.S. and Asia. So, Asian nations amassed a lot of foreign exchange reserves and used them to purchase large amounts of U.S. bonds and other financial securities. With a lower interest rate in effect, it is painful that the U.S. economy has further aggravated the financial market bubble and the over-consumption of its people consequently. Furthermore, the intricacy of the overall economic quantities and structural problems has overheated substantial global economy, which is led by U.S. economy. It has not only forced up the energy and food prices but have to make adjustments eventually since it is hard for the substantial economy to stand inflation pressures.
World economy has to pay heavily accordingly, and it is a foregone conclusion that the global economic growth will slow down this year. The world's GDP rate is expected to drop by 0.9 percentage points from five percent in 2007 to 4.1 percent in 2008, according a recent forecast of the International Monetary Fund (IMF). To date, almost all large economic entities are concerned with a further deterioration of inflation due to a drastic increase in fuel and food prices and a spontaneous sharp fall of their economic growth rate at the same time.
With a further drop in the proportion of U.S. economy in the total global output value amid the new round of major adjustments in the global economic structure, new-emerging economies and leading oil producing nations are likely to play a more vital role. So it means both a challenge and an opportunity for these new-emerging economies. In term of challenge, they have to accept the evidence of a downslide in their economic growth, whereas the opportunity is meant to upgrade their industrial setup and raise the ratio of domestic industries represented by the service sector, so as to braze a new trail of development with growing sustainability, which will in turn facilitate their people sharing material benefits from economic development.
By People's Daily Online and its author is Zhang Bin, an associate researcher of the Institute of World Economics & Politics affiliated to the Chinese Academy of Social Sciences
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