The world economy faces two major risks in the short to medium run. The rapidly growing US current account deficit, now approaching $700bn per year or more than 6 per cent of the entire economy, requires a further large decline in the dollar's exchange rate. That fall could occur rapidly and precipitously at almost any time, driving up interest rates and curbing US growth. It would also weaken expansion in the Asian and European surplus countries unless they found ways to compensate for rises in their currencies by sharply boosting domestic demand.

At the same time, oil prices could spike to new highs. They have again broken through $50 per barrel and could easily rise to $60-$70 per barrel. Every jump of $10 per barrel takes about half a percentage point off annual global growth for several years. The two risks reinforce each other, as we were reminded rudely on February 22 when oil prices surged by almost 6 per cent, the dollar dropped by almost 2 per cent against the yen and euro and the Dow Jones Industrial Average fell by 174 points.