J. Bradford DeLong is Professor of Economics at the University of California, Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.
Berkeley – Since 2003, I have been saying that the global economy is badly unbalanced and vulnerable to a macroeconomic catastrophe that would yield one of the worst episodes of economic distress of modern times. Since 2004, I have been saying that the situation, once it started, would probably become clear within a year: we would know whether the global economy would right itself or begin a downward spiral. In 2004-2007, I considered that I might be wrong about a relatively rapid resolution to the world’s economic distress: as the late Rudi Dornbusch put it, unsustainable macroeconomic imbalances can sustain themselves longer than economists (with their touching faith in rational human decision making) believe is possible.
A year ago, however, with the subprime mortgage meltdown of August 2007, I became certain. The situation had to resolve itself within a year – or else. Either central banks would manage somehow to thread the needle and guide exchange rates and asset prices back to some stable and sustainable equilibrium configuration, or the chaos and disruption in financial markets would spill over into the real economy and a major global downturn would begin. The odds heavily favored the second outcome: global macroeconomic distress.
But I was wrong. Here we are, fully a year later, and things are still balanced on the knife’s edge.
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