1. Possible Tripwires for the Global Economy: 2005-06 Robert F. Wescott, Ph.D. ISEO Conference Bergamo 4 July 2005

2. Energy, Deficits, and Dollar Worry Financial Markets Source: UBS Index of Investor Optimism, May 2005 Factors “Hurting” Investment Climate “A Lot” Energy Prices Outsourcing Budget Deficits Bad Accounting Illegal Immigration Falling Dollar Iraq Threat of Terrorism

3. Possible Global Tripwires Removal of policy support: greater than realized? Oil prices: more slowing than expected? Can U.S. consumers keep driving the world economy? Widening shift from labor to capital in industrial countries hurting growth? Fracturing of international relations: Is Osama bin Laden winning? Shoehorning China into the world economy and China’s international relations George W. Bush: leadership challenges?

4. 2005: Economic Policy Floodgates Closing Source: IMF WEO, Author’s calculations for China

5. Oil: A Growing Burden on the World Economy Source: EIA

6. $20 per Barrel Higher Oil Prices Will Lower Economic Growth, Boost Inflation, and Raise the Unemployment Rate Source: Average of model results from Macroeconomic Advisers, Global Insight, and the International Monetary Fund

7. Out of Control? The U.S. Trade Deficit Source: BEA, OECD

8. First Main Cause: American Households Save Almost Nothing Source: OECD

9. Second Main Cause: U.S. Budget Deficits Source: BEA

10. Foreign Official Purchases of U.S. Debt Have Declined for More than a Year Source: U.S. Treasury Department

11. U.S. Debt, Total and Total Held by Private Sector Source: U.S. Treasury, Federal Reserve

12. Despite Strong U.S. Investment, 20-Year Trend for Large Economies is Down Source: IMF WEO

13. Historically, Rising Interest Rates Add Financial Pressures Source: Federal Reserve

14. Financial Sectors to Watch Closely in 2005-06 as Interest Rates Rise AIG Sub-prime Loans Airlines U.S. Housing Chinese Banking Corporate Governance Risks Autos

15. Falling U.S. Real Wages for the First Time in a Decade Source: Bureau of Labor Statistics

16. Profit Share Has Jumped under President Bush Source: BEA

17. The Bush Legacy: Consumer Patterns Tilting Toward the Rich How Spending Has Changed by Quintile in the Bush Administration Source: BLS, Consumer Expenditure Survey 2003 Bottom Quintile 2 nd Quintile 3 rd Quintile 4 th Quintile Top Quintile 1997- 2000 Recreation, cultural events +28.6%+29.5%-1.5%-0.7%+11.0% Boats, recreational vehicles +85.5%-10.3%+49.4%+13.0%-32.5% Air travel, public transportation +35.9%+25.3%+22.9%+9.5%+5.3% 2000- 2003 Recreation, cultural events -33.8%-25.2%-2.4%+4.8%-0.7% Boats, recreational vehicles -55.8%+14.6%+16.2%-2.3%+49.6% Air travel, public transportation -27.4%-7.1%-25.0%-1.4%-3.9%

18. Returns to Capital Continue to Increase Faster than Wages Percent change 2004 Q1 to 2005 Q1 Source: BEA and BLS

19. Income Inequality Affecting Consumer Spending? Source: International Council of Shopping Centers-UBS Same-store Sales, April 2005 vs. April 2004

20. Germany: A Decade without Wage Growth Source: OECD, IMF WEO

21. German Wage Share Falling: A Shift from Labor to Capital Source: OECD Down 5% points since re-unification

22. A Fracturing of International Relations? Pre-9/11 (2000) After Fall of Saddam (2003) Today (2005) UK837055 France6243 Germany784541 Russia373652 Turkey521523 (Percent reporting favorable view of the United States) Source: Pew Research Center for the People and the Press, June 2005

23. Do You Support the U.S.-Led War on Terror? (Percent responding “yes”)

24. Should Western Europe be more independent from the U.S.? (Percent saying “yes”)

25. Big differences between U.S. and most other countries Source: Pew Research Center for Public and Press, June 22, 2005

26. U.S. China Japan Germany Italy China’s Trend Has Been Sharply Upward (Share of world economy, PPP basis) Source: IMF WEO

27. China’s Exports Are Increasing as a Share of World Trade 19902003 Source: World Bank, World Development Indicators 2005 Others

28. Source: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund China, 1980-2005 U.K., 1820-1870U.S., 1860-1913 Japan, 1950-1974 GDP, % of World Total, PPP Basis

29. Sources: International Iron and Steel Institute, Japan Iron and Steel Federation, Barraclough: Steelmaking, Hogan: The Economic History of the Iron and Steel Industry in the U.S, Hudson & Sadler: The International Steel Industry China, 1980-2005 U.S., 1860-1913Japan, 1950-1974 Steel Production, Millions of tons <10% of world (1843) 36% of world (1900) <5% of world (1950) 19% of world (1974) <4% of world (1980) 29% of world (2005)

30. George Bush’s Political Capital Source: Gallup

31. Among Presidents Early in Their Second Terms, Bush is Quite Unpopular PresidentPositiveNegativeDifferentialDate Johnson66%21%+45% 24-29 June 1965 Eisenhower64%22%+42% 6-11 June 1957 Truman57%26%+31% 11-14 June 1949 Reagan58%32%+26% 7-10 June 1985 Clinton55%35%+20% 26-29 June 1997 Nixon44%45%-1% 22-25 June 1973 GW Bush47%51%-4% 16-19 June 2005 Source: Gallup Presidential Approval Ratings

32. Are U.S. Casualties in Iraq Worth It? Source: Washington Post, June 8, 2005

33. Americans Feel the Country is “Losing Ground” on Most Issues Losing GroundMaking Progress Budget deficit65%6% Social Security’s finances63%6% Health care system62%9% Medicare’s finances56%5% Job availability55%15% Illegal immigration52%11% Quality of education50%20% Illegal drugs46%16% Political corruption41%10% Environmental pollution37%21% International Terrorism31%36% Source: Pew Research Center, May 19, 2005