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Thoughts on the American and world economy from economics editor Zanny Minton Beddoes

Zanny Minton Beddoes is the Economics Editor for The Economist, based in Washington D.C. She oversees the magazine’s global economics coverage, managing a team of writers around the world. She was the opening speaker of the DTA's annual meeting in our nation's capital, and I captured some of the high points from her talk below.

My job is to set the scene for the rest of your discussions. We're living in a connected world where something that happens in a far-off place like Athens can affect you in your hometown.

I wish I could say everything is going to be wonderful, but it isn't. If you look around the world, things are very grim ... with Europe being the grimmest. Things are grimmer now than they were at the start of this year. The world economy is being threatened. There were huge jubilations when news came from Greece that things were going to work out with their economic crisis. The stock market also reacted when things crumbled 36 hours later. There is a sense of shock in Europe that this happened.

The American economy really ground to a halt earlier this year, thanks in part to the turmoil in the Mideast and the earthquake and tsunami in Japan. Consequences from Europe have hit the U.S. stock market. GDP is growing at 2.5%, but that is too slow if you're a country trying to emerge from a recession. The emerging world is slowing as well, including China, but is that slowdown happening too fast? There is a rising concern for bad debts to drag down the Chinese economy. China is the engine of global growth right now.

Is the slowing we're seeing now in America going to turn into something nastier? It's possible that if we make enough policy mistakes, we could see a double-dip recession. At this point in time, what politicians do now will make a huge impact. Policy and policy mistakes will be the defining influence on what happens with our economy and, in turn, the world economy.

Europe is the biggest question mark hanging over the world economy. How can a country that is the size of Georgia (Greece) be threatening to ruin the entire single-currency philosophy? Greece's government never raised much tax revenue and spent way too much. The country consistently lied about its numbers.

The situation is getting worse there than better and investors are becoming more, and not less, nervous. Ireland was recently forced to get rescue funds. Portugal recently had to get rescue funds. People started worrying about Spain and Italy. If Italy and its large economy is being worried about, it strikes at the heart of global markets around the world.

The way the Europeans have handled this crisis has made it worse. Seventeen countries have to agree on a course of action. Think of the struggles we have when one senate and congress have to agree on something. It's very uncertain what will happen in Europe over the next few months. It's a very dangerous situation for the European economy and the world economy. You can't rule out the worst-case scenario that the Euro will completely pull apart. The Europeans will do everything they can to avoid that, even go back into a recession that would be worse than the one that occurred in 2008.

Regarding the U.S., it's depressing but in a different way. We have a chronic problem. I think we are going to have a very protracted period of economic sluggishness that will have dramatic consequences. We have a policy-enduced problem. Do we need short-term stimuli? How do we handle the medium-term budget problem? Anyone outside America looked at us earlier in the year and couldn't believe we almost shut down the government and went into default. I think it did a lot to hurt the confidence around the world in our economy.

We have paralysis now between our president and our government. The standard economic prescription is to sort out the medium-term, and we're heading toward the opposite. That's not good.

There are underlying structural problems in the U.S. as well.

First, the mortgage crisis overhang is having and will have a big impact. It is harder for people to move than it used to be. The burden of bad debt was never dealt with in Japan and it festered in that economy for years. The same could be true here.

Second, there's long-term employment. Average duration of unemployment is 40 weeks and that's the longest in our history. People who are out of work for a long time lose their skills and confidence. They try to go on disability. There is not a good system for retraining people who have been out of work for some time.

Third, there is regulatory uncertainty. The big changes are deterring companies from hiring and investors from putting money into those companies.

What about the emerging economies? There is a danger of slowing. Brazil is dealing with inflation. China could have a property bust like we had in the United States. No country in the world is insulated from what is going on in Europe or the U.S.

Optimal outcome would be a fiscal agreement here and solution to the European debt crisis. I put about a 15% chance of that happening.

What about disaster? Odds of chaotic collapse in Europe is 10-15%. I think that could be avoided with a credit crunch in Europe that pulls them into recession. In turn, the U.S. economy is pulled down. Slow down on both sides of the Atlantic? I think that's about a 25% possibility and not a pretty picture.

The most likely scenario is a muddle-through with sluggishness everywhere. We have a recovery that is slowed tremendously.

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Comment by Vicki Cheeseman on November 2, 2011 at 10:30am
Very hard things to think about...

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