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Thursday, May 19, 2005

Obi-Wan Krugman 

Courtesy of our esteemed colleague Susan Madrak of Suburban Guerrilla, an Asia Times interview with Paul Krugman, who predicts that China's economy will "inevitably" become #1 worldwide, sometime between 2020 and 2040:
The facts are known to all: half-a-trillion-dollar deficits, the endless quagmire in Iraq, the weak dollar, loss of industrial competitiveness. If he were Obi wan-Kenobi in this particular galaxy, what would he do to extricate the US from this mess? "No more budget deficits," he says. "We should be running surpluses." Tax increases: "We should be getting 28% of GDP [gross domestic product] in revenue. We are only collecting 17%." And most of all, clean up the foreign-policy mess. Not much of a chance though. "We are a banana republic. For the moment, all of these things are politically impossible" . . . .

He sees a shift toward diversifying reserves as inevitable both in Japan and emerging Asia. And for him, the dollar is not weak enough: "It should go down more, for instance, against the yen." He does not realistically expect a major devaluation of the Chinese yuan - maximum 5%. Krugman admits it's hard to predict what happens next: "It needs a trigger. But I'm convinced it's the collapse of the housing market in the US that will trigger the dollar's decline."

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