External factors are [first] that the global economy looks like it’s running on a single engine, the one of the U.S.—the other three major ones are sort of stalling. The Eurozone is at risk of deflation and triple dip recession. Japan has been hurt by fiscal contraction following the consumption tax, and China is quite sharply slowing down. So of those four engines of global growth, the U.S. seems to be the only one that’s still running. And that’s a problem because eventually that’s not sufficient. Some of those global slowdowns can affect the United States.
Two, one of the manifestations of that global slowdown and the relative growth differential between the U.S. and the rest of the world has been the appreciation of the U.S. Dollar. So far it’s orderly and the impact on growth is modest, but if the appreciation of the U.S. Dollar were to accelerate, then the impact on growth could be, over time, more significant.
The third aspect of the global economy that might affect the U.S. is, of course, geopolitical risk. Those risks so far with the Middle East or Russia/Ukraine have not had an impact on the markets, but I would say so far the impact has been contained because there hasn’t really been a shock to the supply of gas and oil. But you can see a scenario if those geopolitical risks were to escalate, then the impact on the U.S. could become more significant. So those are the global factors.
Among the domestic factors that can derail the recovery is, first of all, the recovery is still not exceptional in spite of all this monetary stimulus. It has been so far anemic...So there’s a question mark of whether the U.S., like other advanced economies, may be at risk of secular stagnation, a combination of high levels of private and public debt, and a rise of inequality and debt redistributing from those who spend to those who save. An additional point is that as the Fed now ends QE and gradually starts raising rates, there’s a question of whether the U.S. economy can tolerate the rising short rates and long rates that the exit from QE and from zero policy rates will trigger. There is still too much private debt, and there is still too much public debt. We think that the U.S. economy can withstand it, but it’s an open question mark.