Zeev,
It seems to me that Zulauf hits the long term structural problem squarely on the head when he says (long quote ahead because it seems to me so important--especially the bolded part):
<< This country's leading export, Felix quips rather mordantly, is jobs, and that's true of the developed economies generally. Nor is he especially sanguine that lower interest rates will lift Europe out of its economic funk, citing the mournful experience on that score of the U.S and Japan. As to a shot-in-the-arm from fiscal policy, he notes that Japan has tried that tack for 10 years and has nothing to show for it but a spectacularly swollen government debt, now weighing in at 150% of GDP.
Felix sees the "convergence" between two different economic worlds -- one, led by China, featuring low costs and low regulation, the other, high-cost and highly regulated, like ours and Western Europe -- as the major problem for all industrialized countries. As "more and more goods are produced in the low-cost world," he reflects, "the old world loses profits, jobs and income." Which makes it "virtually impossible under these circumstances for economies to re-enter a normal business-cycle expansion as we know it, as the necessary preconditions are and will be lacking."
With 2004 an election year, it's a cinch that Washington will pull out all the stops to get the economy up and moving again. Such an all-court press to stimulate demand here, says Felix, paradoxically will do wonders for the emerging economies, but only further worsen our already horrendous trade and current-account deficits. Indeed, he calculates, the current-account deficit could rise from the present 5% to a formidable 7% of GDP. That would mean "the world would have to buy between $2 billion and $3 billion a day" to keep the dollar stable in the foreign-exchange markets.
Sooner or later, he speculates, the faith of foreigners who hold somewhere between $7 trillion and $9 trillion worth of our assets will be sorely tried. And should that faith weaken, the consequences could be serious, indeed: a collapse in the dollar, a rise in interest rates and recession. In case you're wondering, it could all begin to happen next year.>>
This is why it seems to me that your previously expressed sanguinity about third world development--especially wrt China--is misplaced (please correct me if I recall this wrongly). The imbalances in the world economy that it creates just won't allow real growth, especially if strong middle classes aren't created in the third through generally rising wages for workers. We will get increasingly split economic groups, the rich and the poor with a dwindling middle class, and eventually all hell to pay.
Color me Cassandra
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