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Possible Tripwires for the Global Economy: 2005 -06 Robert F. Wescott, Ph. D. ISEO Possible Tripwires for the Global Economy: 2005 -06 Robert F. Wescott, Ph. D. ISEO Conference Bergamo 4 July 2005

Energy, Deficits, and Dollar Worry Financial Markets Factors “Hurting” Investment Climate “A Lot” Energy Energy, Deficits, and Dollar Worry Financial Markets Factors “Hurting” Investment Climate “A Lot” Energy Prices Outsourcing Budget Deficits Bad Accounting Illegal Immigration Iraq Falling Dollar Threat of Terrorism Source: UBS Index of Investor Optimism, May 2005

Possible Global Tripwires l l l l Removal of policy support: greater than realized? Possible Global Tripwires l l l l Removal of policy support: greater than realized? Oil prices: more slowing than expected? Can U. S. consumers keep driving the world economy? Widening shift from labor to capital in industrial countries hurting growth? Fracturing of international relations: Is Osama bin Laden winning? Shoehorning China into the world economy and China’s international relations George W. Bush: leadership challenges?

2005: Economic Policy Floodgates Closing Source: IMF WEO, Author’s calculations for China 2005: Economic Policy Floodgates Closing Source: IMF WEO, Author’s calculations for China

Oil: A Growing Burden on the World Economy Source: EIA Oil: A Growing Burden on the World Economy Source: EIA

$20 per Barrel Higher Oil Prices Will Lower Economic Growth, Boost Inflation, and Raise $20 per Barrel Higher Oil Prices Will Lower Economic Growth, Boost Inflation, and Raise the Unemployment Rate Source: Average of model results from Macroeconomic Advisers, Global Insight, and the International Monetary Fund

Out of Control? The U. S. Trade Deficit Source: BEA, OECD Out of Control? The U. S. Trade Deficit Source: BEA, OECD

First Main Cause: American Households Save Almost Nothing Source: OECD First Main Cause: American Households Save Almost Nothing Source: OECD

Second Main Cause: U. S. Budget Deficits Source: BEA Second Main Cause: U. S. Budget Deficits Source: BEA

Foreign Official Purchases of U. S. Debt Have Declined for More than a Year Foreign Official Purchases of U. S. Debt Have Declined for More than a Year Source: U. S. Treasury Department

U. S. Debt, Total and Total Held by Private Sector Source: U. S. Treasury, U. S. Debt, Total and Total Held by Private Sector Source: U. S. Treasury, Federal Reserve

Despite Strong U. S. Investment, 20 -Year Trend for Large Economies is Down Source: Despite Strong U. S. Investment, 20 -Year Trend for Large Economies is Down Source: IMF WEO

Historically, Rising Interest Rates Add Financial Pressures Source: Federal Reserve Historically, Rising Interest Rates Add Financial Pressures Source: Federal Reserve

Financial Sectors to Watch Closely in 2005 -06 as Interest Rates Rise U. S. Financial Sectors to Watch Closely in 2005 -06 as Interest Rates Rise U. S. Housing Sub-prime Loans Chinese Banking Corporate Governance Risks AIG Airlines Autos

Falling U. S. Real Wages for the First Time in a Decade Source: Bureau Falling U. S. Real Wages for the First Time in a Decade Source: Bureau of Labor Statistics

Profit Share Has Jumped under President Bush Source: BEA Profit Share Has Jumped under President Bush Source: BEA

The Bush Legacy: Consumer Patterns Tilting Toward the Rich How Spending Has Changed by The Bush Legacy: Consumer Patterns Tilting Toward the Rich How Spending Has Changed by Quintile in the Bush Administration Bottom 2 nd 3 rd 4 th Top Quintile Quintile 19972000 Recreation, cultural events +28. 6% +29. 5% -1. 5% -0. 7% +11. 0% Boats, recreational +85. 5% vehicles -10. 3% +49. 4% +13. 0% -32. 5% Air travel, public transportation 20002003 +35. 9% +25. 3% +22. 9% +9. 5% +5. 3% Recreation, cultural events -33. 8% -25. 2% -2. 4% +4. 8% -0. 7% Boats, recreational vehicles -55. 8% +14. 6% +16. 2% -2. 3% +49. 6% Air travel, public transportation -27. 4% -7. 1% -25. 0% -1. 4% -3. 9% Source: BLS, Consumer Expenditure Survey 2003

Returns to Capital Continue to Increase Faster than Wages Percent change 2004 Q 1 Returns to Capital Continue to Increase Faster than Wages Percent change 2004 Q 1 to 2005 Q 1 Source: BEA and BLS

Income Inequality Affecting Consumer Spending? Same-store Sales, April 2005 vs. April 2004 Source: International Income Inequality Affecting Consumer Spending? Same-store Sales, April 2005 vs. April 2004 Source: International Council of Shopping Centers-UBS

Germany: A Decade without Wage Growth Source: OECD, IMF WEO Germany: A Decade without Wage Growth Source: OECD, IMF WEO

German Wage Share Falling: A Shift from Labor to Capital Down 5% points since German Wage Share Falling: A Shift from Labor to Capital Down 5% points since re-unification Source: OECD

A Fracturing of International Relations? (Percent reporting favorable view of the United States) Pre-9/11 A Fracturing of International Relations? (Percent reporting favorable view of the United States) Pre-9/11 (2000) UK 83 After Fall of Saddam (2003) 70 Today (2005) France 62 43 43 Germany 78 45 41 Russia 37 36 52 Turkey 52 15 23 55 Source: Pew Research Center for the People and the Press, June 2005

Do You Support the U. S. -Led War on Terror? (Percent responding “yes”) Do You Support the U. S. -Led War on Terror? (Percent responding “yes”)

Should Western Europe be more independent from the U. S. ? (Percent saying “yes”) Should Western Europe be more independent from the U. S. ? (Percent saying “yes”)

Big differences between U. S. and most other countries Source: Pew Research Center for Big differences between U. S. and most other countries Source: Pew Research Center for Public and Press, June 22, 2005

China’s Trend Has Been Sharply Upward (Share of world economy, PPP basis) U. S. China’s Trend Has Been Sharply Upward (Share of world economy, PPP basis) U. S. China Japan Germany Italy Source: IMF WEO

China’s Exports Are Increasing as a Share of World Trade 1990 2003 Others Source: China’s Exports Are Increasing as a Share of World Trade 1990 2003 Others Source: World Bank, World Development Indicators 2005

GDP, % of World Total, PPP Basis U. K. , 1820 -1870 Japan, 1950 GDP, % of World Total, PPP Basis U. K. , 1820 -1870 Japan, 1950 -1974 U. S. , 1860 -1913 China, 1980 -2005 Source: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund

Steel Production, Millions of tons U. S. , 1860 -1913 Japan, 1950 -1974 19% Steel Production, Millions of tons U. S. , 1860 -1913 Japan, 1950 -1974 19% of world (1974) 36% of world (1900) <5% of world (1950) <10% of world (1843) China, 1980 -2005 29% of world (2005) <4% of world (1980) Sources: International Iron and Steel Institute, Japan Iron and Steel Federation, Barraclough: Steelmaking, Hogan: The Economic History of the Iron and Steel Industry in the U. S, Hudson & Sadler: The International Steel Industry

George Bush’s Political Capital Source: Gallup George Bush’s Political Capital Source: Gallup

Among Presidents Early in Their Second Terms, Bush is Quite Unpopular President Positive Negative Among Presidents Early in Their Second Terms, Bush is Quite Unpopular President Positive Negative Differential Date Johnson 66% 21% +45% 24 -29 June 1965 Eisenhower 64% 22% +42% 6 -11 June 1957 Truman 57% 26% +31% 11 -14 June 1949 Reagan 58% 32% +26% 7 -10 June 1985 Clinton 55% 35% +20% 26 -29 June 1997 Nixon 44% 45% -1% 22 -25 June 1973 GW Bush 47% 51% -4% 16 -19 June 2005 Source: Gallup Presidential Approval Ratings

Are U. S. Casualties in Iraq Worth It? Source: Washington Post, June 8, 2005 Are U. S. Casualties in Iraq Worth It? Source: Washington Post, June 8, 2005

Americans Feel the Country is “Losing Ground” on Most Issues Losing Ground Making Progress Americans Feel the Country is “Losing Ground” on Most Issues Losing Ground Making Progress Budget deficit 65% 6% Social Security’s finances 63% 6% Health care system 62% 9% Medicare’s finances 56% 5% Job availability 55% 15% Illegal immigration 52% 11% Quality of education 50% 20% Illegal drugs 46% 16% Political corruption 41% 10% Environmental pollution 37% 21% International Terrorism 31% 36% Source: Pew Research Center, May 19, 2005