CAMBRIDGE – The global economy is a runaway train that is slowing, but not quickly enough. That is what the extraordinary run-up in prices for oil, metals, and food is screaming at us. The spectacular and historic global economic boom of the past six years is about to hit a wall. Unfortunately, no one, certainly not in Asia or the United States, seems willing to bite the bullet and help engineer the necessary coordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up.
Instead, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policymakers in most regions have to start pressing hard on the brakes, not the accelerator.
Don’t look to the US for leadership in a presidential election year. On the contrary, the US government has been handing out tax-rebate checks so that Americans will shop until they drop, and now Congress is talking about doing more.
Don’t look to emerging markets, either. Desperate to sustain their political and economic momentum, most have taken a wide variety of steps to prevent their economies from feeling the full brunt of the commodity price hikes. As a result, higher commodity prices are eating into fiscal cushions rather than curtailing demand.