What's Up In The Global Economy

I had the great fortune while at an Executive Education course at Harvard Business School last week to participate in a case discussion with Professor Rawi Abdelal, an expert in international political economy. We studied a case concerning the U.S. current account deficit and the various causes and effects of the issues now affecting the global economy. It would be hard to put in a nutshell everything that was covered, so I'll just share what I left the room thinking about.

First, the fact that the savings rate in the U.S. is zero is extremely unhealthy and Americans need to start saving more (understandably hard to do when incomes are stagnant/falling and unemployment is rising). Second, solving the problems will be incredibly difficult and complex because it is likely to require close coordination of many countries around the world and such coordination is difficult under the best of circumstances; in addition, for Americans to save more, we will need to spend less - which doesn't exactly help an economy that is in recession. The final message I took away is that macroeconomic factors are likely to play a disproportionate role in the performance of businesses over the next several years, and it's therefore critically important to understand how those factors will affect each business leader's own business.

The class reminded me of two terrific articles by James Fallows which are linked below. The first article was written in 2005 and imagines what the world economy will look like in 2016; what's scary is that many of the things Fallows predicted have already come to pass. The second article looks more specifically at China and the nature of the economic relationship between China and the U.S. ; the bottom line is that they need us to buy their exports (which creates jobs in the rapidly populating Chinese cities, providing the stability the Chinese government desperately wants) and we need them to buy our treasury bills and bonds (to finance our deficits).

The first article is Countdown to a Meltdown; the second is The $1.4 Trillion Question.

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