interest rates rise" in response to the Fed, she said. "It's all coming home.
That will be a good sign for the U.S. economy."
But the transition will be much more difficult for emerging nations that depend on exports and "hot money" flows from the U.S. and other foreign investors to fuel investment and growth. They have not developed the kind of rich, consumer-led economy of the U.S., which can keep growing without outside help, she said.
"Without the 'one night stand' money" made available to investors by the Fed's easy-money policies, she said, "it will be very challenging for an emerging market economy" in the months ahead.
Debt-stricken European countries such as Greece, Spain and Italy also are facing the hardships of significantly higher interest rates in the wake of the Fed's plans, said Axel Weber, chairman of Swiss banking giant UBS.
"For the sake of the European periphery, I am concerned," he said at the conference. "We're seeing the re-emergence of pressure in Europe as a result of the normalization of interest rates by the Fed."
The only hope for the worst-off European economies, which have fallen into deep recessions with unemployment rates as high as 27 percent as a result of the Continent's sovereign debt crisis, is that the European Central Bank will step in and take extraordinary measures such as those used successfully by the Fed, said Julian Callow, chief international economist at Barclays Bank.
Chinese growth in question
Perhaps the biggest danger is the let-down for China as it struggles to cope with the European recession and higher global interest rates. That could be the most troubling for the world economy, Mr. Callow said, because it was robust growth in China that buoyed global economies in the aftermath of the 2008 crisis.
"Nearly half the growth in the world economy in the last five years came from China," and in particular was spawned by a frenetic Chinese building binge on skyscrapers, factories, roads, bridges, airports and all other manner of infrastructure that required massive imports of basic materials such as copper, coal and iron, he said. China's boom spurred an economic boom in commodity-producing nations from Australia and Canada to Peru and Brazil.
Those booms are over, and China could face a destructive real estate market collapse and financial shake-up after its overheated building boom that could reduce growth to paltry levels there and start to threaten global growth, Mr. Callow said.
"I'm worried that China could slow to 3 percent," down from the double-digit annual growth rates China took for granted for decades, he said.
Michael Drury, chief economist at McVean Trading & Investments, agreed that with growth averaging from 0 percent to 2 percent in the Eurozone and the U.S. for the foreseeable future, growth in the world economy hinges on a revival in China, and the prospects are not good.
He said growth already has fallen to between 5 percent and 6 percent in China and could go lower as the government's efforts to stimulate the economy with more debt-financed spending on infrastructure are producing feeble results.
"The basic problem in China is they're in a classic middle-income trap," he said. Having attained a modest level of incomes between $4,000 and $5,000 per person through rapid industrialization, China's fast-rising wages are impairing the country's competitive edge, but its consumers still do not have enough purchasing power to keep the economy growing on their own.
On top of that, "they mishandled the stimulus. All they got was a massive inflation and an increase in wealth at the top," he said. "I would strongly suggest that you don't invest any money in the Chinese stock market. Even the Chinese are trying to get their money out of the country."
Fed focuses on U.S. economy
Worries about growth in Europe, China and the rest of the world do not appear to be much on the minds of Fed officials as they debate how soon to taper off their purchases of bonds.
James Bullard, president of the St. Louis Federal Reserve Bank, said he is assuming and hoping that the recession in Europe will end soon while growth in China will remain between 7 percent and 8 percent.
"There's some risk of a broad turndown" in global growth as a result of the Fed's actions, he said. Mr. Bullard has urged caution at the Fed not because of weak global growth but because he thinks the Fed could be jumping the gun and assuming that growth is healthier in the U.S. than it actually is.
U.S. growth, in fact, has averaged only 1 percent in the past three quarters, despite the Fed's bond-buying campaign, and may not pick up to more solid rates of more than 2 percent as expected by a majority of Fed members next year, he said.
Meanwhile, inflation in the U.S. has declined to the 1 percent threshold below which the Fed considers it to be dangerously low, he said. For that reason, Mr. Bullard said, the central bank should hold off any change in policy until it sees evidence of more solid growth.
Mr. Bullard said he is confident that Mr. Bernanke agrees that the evidence of economic recovery must be more convincing before the Fed acts on its tapering plans.
Charles Plosser, president of the Federal Reserve Bank in Philadelphia, is among of a growing chorus of Fed officials calling for a quick end to the easing programs. He said he does not think the economy needs any further aid and the dangers of keeping such loose money policies in place can be ignored no longer.
"The economy hasn't exactly boomed because of it," he said, while the prospects for further major disruptions in global stock and bond markets are growing.
"It's the law of unintended consequences, if we leave interest rates too low for too long," he said. "It's going to be a long, steady, slow slog toward recovery" no matter what the Fed does, he said.
(c)2013 The Washington Times (Washington, DC)
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