The world today faces a toxic cocktail of three ingredients according to Jeremy Warner writing in the Daily Telegraph. They are low oil prices, rising US interest rates and China’s travails. His argument on the first point is that the cheaper price of oil will cause the price of dollar to rise and this, in view of huge dollar debts that the Third World countries already have, will sink them further. On the second point, I don’t think that US interest rates will rise any further than the recent 0.25% rise. It will cause sufficient trouble within the American economy. It will have to be brought down again.
On China’s problems I’ve been changing my mind over the past few months. Although I think that China will dig its way out of its present financial mess in the next couple of years it still has the larger problem of some 500 to 600 thousand extremely poor rural Chinese that it hasn’t yet been able to help. The provincial governments have built anything up to an estimated 50 ‘ghost cities’ waiting for occupation by hoped-for expanding industries in the coastal provinces. However, the decrease in the annual growth in Chinese exports in the last two years suggests that China may already be getting stuck at is present economic level — something that economist Barry Eichengreen suggested some years ago.