A lunch time talk by Niall Ferguson suggests a grim picture. Even if the world economy is not headed towards a 1930s-style catastrophe, it will remain mired in a "depression" like that experience in the 1870s, argues Ferguson, with long-term stagnation and deflation. This will be a bad time for everyone, except for populists and those who like to demonstrate in the streets.
The biggest winner? Ferguson suggests it may be China, who will supplant the U.S. as the global hegemon, as the U.S. replaced a similarly heavily-indebted Britain at the end of World War II.
I don't know about the China bit, but the rest is pretty scary. For a somewhat more cheery prognosis, you may want to turn to my latest Project Syndicate column, right here.
I agree with Niall Ferguson that the U.S. and the other advanced countries will not resume rapid growth anytime soon. With so many trillions of asset destruction, consumption growth will remain slow for a while, as will the process of finding another engine of growth to replace finance.
But as far as the developing nations are concerned, this need not be a tragedy. After all, their growth depends on their ability to import and deploy the stock of knowledge that already exists in the rich world--a stock that will not disappear or dissipate just because growth there has slowed down.
And as long as the de-globalization in question is simply a reversion to something like what we experienced in the 1960s and 1970s rather than the 1930s, the opportunities for convergence will still be there.
What will be ruled out of course is the kind of strategy that depends on external demand to increase the supply of domestic non-traditional tradables (manufactures, tradable services, and non-traditional agricultural products). This kind of undervaluation-cum-trade surplus strategy needs to be replaced by one that relies much more on domestic demand.
As I explain in my column, it is possible to spur the production of tradables without generating a trade surplus. The country that will need to undergo the largest adjustment of this type is China. And it is not clear that China is ready to undertake that transition.
So in the end, China may not emerge as the ultimate winner.