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Tuesday, September 28, 2004

Morgan Stanley Worries About World/US Economy 

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Several potential implications of this new world order worry me the most: First, there is the growing risk of politically-inspired protectionism in the US. A saving short economy will continue to suffer from large current-account and trade deficits -- putting unrelenting pressure on job creation. Washington -- even though it is creating these problems with a penchant for deficit spending -- will look to scapegoats in the arena of foreign trade. US Treasury Secretary John Snow’s recent broadside aimed at Chinese currency policy is especially worrisome in that regard. Second, China is hurtling down an increasingly unstable path by mismanaging its domestic and international finances. Inflation is now on the rise in this overheated economy and could well continue to accelerate until China shifts its macro policy settings (monetary, fiscal, and currency) into restraint. A failure to do that is a recipe for the dreaded hard landing. Third, Europe is being squeezed harder and harder. Asia’s dollar pegs means that the euro has to bear a disproportionate share of any dollar depreciation -- a depreciation that is a perfectly normal outgrowth of any US current-account adjustment. Europe’s economic malaise is a source of considerable political angst in that region. As a consequence, continued Asian currency pegging and dollar-buying could raise the likelihood of European protectionism -- especially toward Asia.





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