by Calculated Risk on 5/17/2008 02:57:00 PM

From Atlanta Fed President Dennis Lockhart: Emerging Economies and Global Capital Flows

It used to be said that when the United States sneezes, the world catches pneumonia. A better metaphor for today would be that when the United States gets a cold, the world gets a cough and the sniffles. Questions about decoupling are frequently heard in economic discourse, and they include the following:

• Will the U.S. downturn drag the rest of the world down, especially China and other consumer product exporters?
  
• Is the rest of the world positioned to withstand a negative demand shock of some duration from the United States?
  
• Is global growth being driven by increasingly mature, independent, and sustainable sources of economic dynamism?
  
• Do the larger economies—BRICs included—have tools to stimulate countercyclical activity in the face of weakness on the part of the United States?
  

I won't discuss these questions in detail, but let me make a few observations. In the narrow sense, the decoupling debate has been about whether slower spending in the United States will lead to slower GDP growth in countries dependent on U.S. import demand. This concern is then broadened to a global slowdown or recession.

My view is the following: Global economic integration has progressed in recent years to the point that a slowdown in the United States will unquestionably be felt, but not as severely as imagined by some. Domestic growth momentum in many emerging economies will attenuate the influence of U.S. weakness. And the accumulation of foreign currency reserves by these countries—the result of trade surpluses—provides an accessible resource to stimulate their own domestic growth to offset weaker exports, should that weakness materialize.

I've highlighted the last point, because this raises an interesting question: What happens if these countries use these accumulated surpluses to stimulate their domestic economies to offset weaker exports to the U.S.? Wouldn't they have to sell U.S. assets? And wouldn't that push up interest rates in the U.S. - further weakening the U.S. economy - and further weakening exports for these same countries? I'm not sure spending these surpluses will work as well as Lockhart envisions.