First slips down the slope…

Nouriel Roubini on †Project Syndicate wrote in Only the weak survive:

The risk of global currency and trade wars is rising, with most economies now engaged in competitive devaluations. All are playing a game that some must lose. Today’s tensions are rooted in paralysis on global rebalancing. Over-spending countries – such as the United States and other “Anglo-Saxon” economies – that were over-leveraged and running current-account deficits now must save more and spend less on domestic demand. To maintain growth, they need a nominal and real depreciation of their currency to reduce their trade deficits.

I would like to point several things that come to my mind. The first is that trade and currency wars will exacerbate all tensions in the world leading to greater global conflict – perhaps even a real war. I expect this (perhaps only a vain hope) to be at a low level, but we may see a belligerent move from some countries who feel pressured in this new international game of chicken.

The plight of the less well off will be ignored for most of 2011.

The USA is more likely now to move into a second recession, perhaps even deflation.

Al Qaeda is smiling at the plight of the non-Islamic world, and waiting to make a move. The large scale flood disaster in Pakistan will weaken Pakistan, and the USA (which has done little to date – Haiti has had more mind share) will be in no position to help. Perhaps China will intervene more in this area for reasons of its own geopolitical outlook.

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