The U.S. dollar's drop is having a ripple effect worldwide, being blamed for labor strife in the Middle East and job losses in Europe.
When it was strong before 2000, the US dollar allowed Americans to gobble up foreign goods cheaply and it provided worldwide economic clout, The Washington Post reported Monday. Now, though, economists said the weakened dollar is having a diminishing effect abroad.
Pravda.Ru has asked Christian E. Weller, Senior fellow, Center for American Progress, and professor of public policy, University of Massachusetts Boston, to give some forecasts for 2008.
Pravda.Ru: What are the most important achievements of 2007 in the field of global and US economy?
Christian Weller: The most important achievement in the global economy is actually a reflection on its failure. The world's largest central banks (and a few finance ministers) managed to intervene to avoid a severe credit crunch and wide spread economic fallout from the growing crisis in the subprime mortgage market in the US.
The crisis and its reaction, though, only served to highlight the fact that regulatory systems in the US and many other financial systems were inadequately equipped to handle rapid financial innovation and control burgeoning financial bubbles that threaten the health of the global economy. The subsequent interventions were thus only stop gap measures that should be followed by a serious discussion over improved transparency and updated regulatory structures.
Pravda.Ru: What can 2008 bring?
Christian Weller: Primarily, many observers underestimate the severity of the US troubles and overestimate the reach of the Fed's policy decisions. Specifically, the overvaluation in the residential real estate market in the US dwarfed anything that we have seen since World War II, as did the run-up in mortgage debt. It will take either a very severe recession, a prolonged economic slowdown or a serious policy intervention to correct these imbalances.
Policy makers and public and private investors will likely step in to avoid a major recession by, for instance, buying up lower valued assets. Alternatively, the appetite for large-scale public policy interventions to accelerate income growth through, for example, faster demand growth spurred by investments in new technology, energy efficiency, transfers to the states etc. seems currently very limited. Instead, policymakers will limit themselves to smaller-scale interventions, such as some relief for troubled homeowners, lower interest rates, and some tightening of regulatory oversight in credit markets.
The likely result will be a continued slow growth pattern for the US, accompanied by a weak dollar, rising unemployment, falling short-term interest rates, and stable or possibly rising long-term interest rates. Weaker demand and lower dollar could mean slowing growth in many overseas markets due to less demand for imports, including petroleum products.
Prepared by Alexander Timoshik