A senior American central banker says the global recovery is gaining pace and won't be derailed by the problems of sovereign debt in the developed world.
"There will be no double-dip," says James Bullard, chief executive and president of the Federal Reserve Bank of St Louis, and a participant on the Federal Open Market Committee, which decides US monetary policy. He says his personal belief is that Asian economic leadership will continue to drive economic expansion.
The biggest risk to that expansion, however, is that Asia somehow falters.
He spoke earlier this week in Hong Kong at a dinner organised by the Institute of Regulation and Risk North Asia, along with Sir John Gieve, former deputy governor of the Bank of England, and other central-banking experts. This follows a similar discussion earlier this year on asset bubbles.
Bullard acknowledges the problems evident in the Chinese economy and the idea that some sectors are experiencing a bubble. However, he says that given China's rapidly developing economy and adoption of productivity technology, it's no surprise if prices are not always set efficiently. The important thing is that rapid growth occurs roughly in line with fundamentals, which he judges to be the case.
Quoting statistics from the International Monetary Fund, whose prediction is for global GDP to expand by 4.2% this year and 4.3% for 2011, he says the leadership will come from Asia, but the US is also contributing.
By the autumn, US GDP should have grown enough to bring the nation's real GDP to its mid-2008 peak. This is being driven by consumption, which is back to its previous peak levels, and investments. What is lagging is job creation, but productivity gains will have to give way to employment gains if companies are to continue to grow.
The US also benefits from the dollar's reserve-currency status and as the world's safe haven. This role continues to keep Treasury yields low, which allows American companies and individuals to access affordable credit. Finally, only a fraction of the $780 billion fiscal stimulus package of early 2009 has been spent, meaning there is considerable support for the economy over the next year or so.
The medium-term threat is inflation. "With interest rates near zero and the expansion of the Federal Reserve's balance sheet, the risk is that quantitative easing turns into substantial inflation if we don't play our cards right," Bullard warns.
He expects the next five years to remain volatile, because of the changes in how central banks operate. Bullard notes that for the past several decades, the consensus has been that central banks reinforce their desired policy by articulating it in public, and setting expectations. Their reaction to the global financial crisis involved many unprecedented actions. It will take a few years for central banks to settle on a new set of credible best practices.
The eurozone has lost credibility with international investors, but can win this back via sustained fiscal consolidation, Bullard suggests. He says austerity will help drive future growth, while European Union support for southern European government debt buys time for the region to restructure.
While EU policies that essentially guarantee indebted southern European governments may not be fair and skew incentives, they also show that EU members are unlikely to buckle under pressure, Bullard says. The US does not face the same immediate pressure, he says, but the government needs to show a commitment to fiscal consolidation, in order to avoid a future test of its credibility.
Gieve predicts the eurozone will hold together. The EU passed a $1 trillion package, with German backing, to help not just Greece but also other troubled member states, which reflects a tremendous commitment to the European ideal. Besides, with debts denominated in euro, the pain for a country like Greece to leave the eurozone would outweigh the benefits.
The former BoE executive also notes that Greek debt should be put in perspective: the richer EU states can afford a bailout. It's a question of political will, not wealth, and Gieve believes the will exists.
Bullard notes that the exposures to Greece and other southern-member countries held by rich-country banks makes it even more urgent for politicians in Germany and France to engage in bailouts if required.
Gieve says fears about quantitative easing leading the British government to default are way overblown. He notes that this crisis is very manageable compared to what Britain faced in the late 1970s, when it was forced to turn to the IMF for help.
"The UK faces five years of public-sector retrenchment," Gieve notes. "It will be painful, but it will happen."
Both Bullard and Gieve believe that such restructuring will lay the groundwork for another era of strong economic expansion in the West.