The U.S. Economy Faces the Guillotine

Extrapolating from existing trends—which is how most economists forecast—the United States will likely continue to struggle as it cleans up after the deluge of bad debt and copes with systemic credit issues, while emerging markets like China and India will probably downshift from overdrive into high gear. But forecasts at times of transition are inherently unreliable. To a large degree, the global economy and some of its high-flying constituents are in uncharted territory.

That doesn't mean the world is facing the Great Depression II—the world's economies are radically different than they were fourscore years ago, when our forefathers were forced to beg for dimes. At Davos, Fred Bergsten, director of the Washington-based Peterson Institute of International Economics, pointed out that emerging markets today constitute about half the global economy. Assuming that the United States and Japan are flat, and emerging markets grow at 5 or 6 percent, the global economy would still show decent growth in 2008. "My conclusion is that a global recession is inconceivable," said Bergsten.

But in economics and the markets, inconceivable developments—good and bad—tend to crop up with some regularity. That point was dryly nailed home at Davos by Jacob Frenkel, the former governor of the Bank of Israel. Amid a generally optimistic session about the fate of the global economy, he pointed out: "Last year, nobody mentioned subprime."

With Stefan Theil, Rana Foroohar and Arlene Getz in Davos, Christian Caryl and Akiko Kashiwagi in Tokyo, Jason Overdorf in New Delhi, Duncan Hewitt in Shanghai, Temma Ehrenfeld and Ashley Harris in New York and Jessica Ramirez in Washington

© 2008