Slowing U.S. economy inflicts pain around the world

— -- Think of the United States as an intrepid adventurer who has stumbled into quicksand. As Uncle Sam struggles to free himself, a good Samaritan — aka "The Rest of The World" — extends a branch from shore and begins pulling him to safety.

Six months into the most serious financial crisis in a decade, that's about where the global economy stands. For now, customers in foreign lands are steadying a U.S. economy laid low by a debilitating credit crunch, which originated with subprime mortgages but has spread a chill throughout the entire banking system. Net exports are about the only bright spot on the economic horizon, adding 0.9 percentage points to U.S. economic growth in the third quarter. That's the biggest boost since 1980.

But now, the question is: What happens next? Will the world complete its rescue of the United States, or will Uncle Sam drag the rest of the world down?

"If it's a really steep downturn, it's going to pull everyone into its vortex," warns Harvard University economist Kenneth Rogoff.

If the United States manages to avoid a recession in 2008, Rogoff and most mainstream economists are sanguine about global prospects. But with U.S. growth in the final quarter of this year expected to be somewhere between anemic and non-existent, oil prices hovering above $80 a barrel and resurgent inflation in developed and developing economies alike, there are plenty of reasons to fret. "This is becoming a global phenomenon," says Sung Won Sohn, chief executive of Hanmi Bank in Los Angeles. "I think probably the worst is yet to come."

Major test of global system

The current crisis represents the first major test of the system of financial globalization that developed since the 1989 fall of the Berlin Wall. It's easy to lose sight of the dramatic changes that have remade global finance in less than two decades. Today, more capital flows around the world than at any time in the past century. Since 1973, cross-border capital flows have grown from 5% of the global economy to 21%, according to Frederic Mishkin, a Federal Reserve governor and author of The Next Great Globalization.

Today's financial links between nations are "like a spider web," says Sohn. "We are no longer alone. I don't think we can control our own destiny, whether in Korea, the U.S., Japan, wherever," he says.

For the USA, what was in 1989 a stream of capital moving in and out of the domestic economy has become a torrent. The value of foreign stocks, bonds and factories owned by Americans at the end of 2006 reached $13.7 trillion, up from just $2.1 trillion in 1989. Likewise, the value of American assets owned by foreign investors hit $16.3 trillion vs. $2.3 trillion in 1989.