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Paris: "I always thought that decoupling was a myth," US Treasury Secretary Henry Paulson told reporters last week after a Tokyo meeting of finance ministers and central bankers from the Group of Seven (G7) countries.
He should have worked for Goldman Sachs Group Inc., one of the biggest proponents of the thesis that the rest of the world could weather a slowing US economy. He probably could have saved investors a lot of money by advising them that if America's economy and financial markets slumped, Europe, Asia and the emerging world would follow.
Oops. Paulson used to work for Goldman Sachs. In fact, before becoming treasury secretary in 2006, he headed the venerable investment bank.
The notion that Europe, Japan and developing countries could break free of the dominating influence of the $13 trillion US economy was one of the bolder theories put forward since World War I, from which the US emerged as the preeminent global power. So what went wrong?
Decoupling was founded on a set of suppositions relating to the depth of an American slowdown; European and Japanese economic power; the buoyancy of emerging-market consumers; the strength of intra-Asian trade; and Europe's dwindling export dependence on the US. They didn't all pan out.
"The falls in stock markets all over the world this year seem to have been triggered by the realisation that US weakness is likely to persist and that everybody will be affected in one way or another," says Gabriel Stein, a senior economist at Lombard Street Research Ltd. in London.
Myth No. 1: Although the US economy will slow, it will avoid a recession.
Maybe so, but a recession over the next 12 months is now a 50 per cent probability, up from 40 per cent in January. The US is confronted with its worst housing crisis in a quarter century; gross-domestic-product growth slowed to an annualised 0.6 per cent in the fourth quarter last year, and January payrolls tumbled by 17,000, the first decline since August 2003.
Myth No. 2: The rest of the world can escape the clutches of a US slowdown.
Not according to history. The US has had five recessions since 1970. Each time, other economies' GDP growth also declined. The US economy fell an average of 3.8 per cent during the recessions of 1974-75, 1980, 1982, 1991 and 2001, with other industrial countries slowing an average of 2 per cent, Latin America falling 1.7 per cent and emerging Asia declining 1.3 per cent, according to the International Monetary Fund.
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