STEVE INSKEEP, Host:
Lower oil prices, however long they last, may be one of the few economic bright spots. Next week, we'll get an estimate of how the US economy did in the third quarter. An economist-predicted downturn of the United States, which they say will be felt around the world, that's globalization. The world economy is now so interconnected that countries go through recessions and recoveries together. NPR's Tom Gjelten reports.
TOM GJELTEN: Six months ago, it appeared the sub-prime mortgage crisis meant the United States was in for a period of economic distress. But at least one economist, Nouriel Roubini, was already on the record predicting an international crisis. His cover article in the March issue of Foreign Policy magazine was titled, The Coming Financial Pandemic. Speaking at Columbia University this week, Roubini said the economic data eventually showed he was right six months ago.
INSKEEP: The numbers from the second quarter this year suggested that not only the US was entering a recession, but also the UK was entering a recession, that the rest of Europe was entering a recession, Japan was beginning to have an economic contraction, Canada was starting to have a recession.
GJELTEN: Since then, it's only gotten worse.
GJELTEN: People usually say, when the US sneezes, the rest of the world catches the cold. And this time around, the US is not just going to sneeze, they're going to have a severe case of pneumonia, or something more severe than that, and therefore the transmission to other countries is going to be also very, very severe.
GJELTEN: Indeed, it's the rate at which this economic crisis has been transmitted from the United States to the rest of the world that has most caught the attention of international economists.
GJELTEN: The speed is phenomenal and frightening.
GJELTEN: Jeffrey Sachs is director of the Earth Institute at Columbia University. He points to one event in particular: the collapse of the Lehman Brothers investment bank on the weekend of September 14.
GJELTEN: And it was really the shock of the financial panic in the week of September 15 that ricocheted around the world nearly instantaneously that has made the worldwide contagion effect utterly dramatic.
GJELTEN: Contagious diseases spread when people come into contact with each other; the financial crisis now sweeping the world could not have spread so quickly were it not for the many ways the economies of the world are now so interconnected - much more so than at the time of the last major global recession 30 years ago. Jeffrey Sachs, who is also an economic adviser to UN Secretary General Ban Ki-moon, explains how it works.
GJELTEN: The amount of trade as a share of national income, the financial flows as a share of just about anything, are much larger now than they were back in the 1970s. And this means that the piping of the international system connects the world's economies in more varied ways and certainly in more intense transmission linkages than would have been true 30 years ago.
GJELTEN: US banks got in trouble because they were holding mortgage securities that were worth a lot less than the banks initially thought they were. But it now turns out that many European banks had invested in those same mortgage securities. The boundaries between national economies are disappearing. This can be helpful. US consumer spending boosts the companies in China that make the goods US consumers buy. China in turn has more money to invest in the United States. This coupling can mean the effects of a downturn in any one country can be softened. Michael Mussa is a former chief economist at the International Monetary Fund and now, a senior fellow at the Peterson Institute for International Economics.
GJELTEN: When underlying forces are going in different directions, with the US economy tending to slow and the rest of the world still pretty strong, it helps push us up at the same time it's slowing them down a little bit. When we're all slowing down together, though, then it's self-magnifying.
GJELTEN: Self-magnifying, meaning a global downturn moves more quickly, spreads more widely and goes deeper than it otherwise would. This is what's happening right now - because of globalization. But there is a silver lining, says Michael Mussa.
GJELTEN: For the same reason that going down together tends to magnify on the downside, coming up together tends to magnify on the upside.
GJELTEN: Globalization on the one hand means recessions can be felt instantly around the world. But it should also mean that when a few key economies make a turning point toward recovery, those countries will quickly lift the rest of the world with them. Mussa thinks that global uptrend should happen sometime next year. Tom Gjelten, NPR News Washington.