For most of my life, the U.S. has been the engine for world economic growth.  For a time in the 90’s, it was thought that the new European Union would take our place, and they almost did.  Yet, we were finally displaced by China and other emerging markets during the last decade, when they routinely experienced better than 10% annual growth in GDP.

Now, things are looking much more grim for China.  Inflation has broken out badly.  The stated rate is 5.5% but is actually much higher.  GDP growth was “only” 9.7% during the first quarter this year.  There have been an unprecedented number of public demonstrations and even riots this year, protesting the lack of jobs, as well as the high cost of housing, food, and fuel.  The Chinese government invariably over-reacts, especially in light of the Arab Spring this year.

To cool off their inflation rate, the Chinese are raising interest rates, with another rise expected next week.  They need less growth, not more.  This is the opportune time for them to let the Yuan slowly increase, and they have been. 

Another way to view this is that the world’s economic engine is slowing down, something a world recovering from the worst recession since the Great Depression can not afford.  Without the U.S., without Europe, and without China, who will become the essential engine to drive world growth?

There are other BRIC nations, i.e., Brazil, Russia, and India.  Brazil is the best bet, but they have instituted capital controls to slow down their growth as well.  Russia is a one-horse economy, dependent upon oil.  India is rapidly becoming as politically dysfunctional as Japan and the U.S.

Maybe, the engine will not be a nation but an economic sector.  The President hopes it will be “green energy.”  That would be fine.  The world economy just needs an engine. Almost any engine will do!  Even a VW engine looks pretty good in a BMW . . . that has no engine.