The central banks' mistake has been compounded by the emerging economies' refusal to allow their exchange rates to rise, piling up foreign-exchange reserves instead. Bizarrely, by financing America's deficit, poor countries are subsidising the world's richest consumers. The opening up of emerging economies has thus not only provided a supply of cheap labour to the world, it has also offered an increased supply of cheap capital. But this survey will argue that the developing countries will not be prepared to go on financing America's massive current-account deficit for much longer.
At some point, therefore, America's cost of capital could rise sharply. There is a risk that the American economy will face a sharp financial shock and a recession, or an extended period of sluggish growth. This will slow growth in the rest of the world economy. But America is less important as a locomotive for global growth than it used to be, thanks to the greater vigour of emerging economies. America's total imports from the rest of the world last year amounted to only 4% of world GDP. The greater risk to the world economy is that a recession and falling house prices would add to Americans' existing concerns about stagnant real wages, creating more support for protectionism. That would be bad both for the old rich countries and the new emerging stars.
