Nowhere is this truer than in the U.S., where Trump has engaged in unrelenting attacks on institutions ranging from the mainstream media to the Federal Bureau of Investigation, not to mention adopting a rather cavalier attitude toward basic economic facts. At the same time, the left seems eager to portray anyone who substantively disagrees with its proposals as an enemy of the people, helping fuel both economic illiteracy and a hollowing out of the center.
Beyond existential risks, there are near-term risks. One, of course, is a potential sharp growth slowdown in China, which more than any other major economy in the world today seems vulnerable to a significant financial crisis. Perhaps the number one risk to the global economy in 2018, however, is anything that leads to a significant rise in real (inflation-adjusted) interest rates.
Low interest rates and easy monetary policy have papered over a multitude of financial vulnerabilities around the world, from Italian and Japanese government debt to high corporate dollar debt in many emerging markets, and perhaps account for political support for trillion-dollar deficits in the U.S. Admittedly, markets see little chance of any significant rise in global interest rates in 2018. Even if the Fed raises rates another four times in 2018, other major central banks are unlikely to match it.
But market confidence that interest rates will remain low is hardly a guarantee. A plausible pickup in business investment in the U.S. and northern Europe, combined with a sudden slowdown in Asian economies with surplus savings, could in principle produce an outsize rise in global rates, jeopardizing today’s low borrowing costs, frothy stock markets and subdued volatility. Then, suddenly, the economy’s seeming disconnect from politics might end, and not necessarily in a happy way.
Kenneth Rogoff, professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. The co-author of This Time is Different: Eight Centuries of Financial Folly, his new book, The Curse of Cash, was released in August 2016.