Why democrats can sleep at night.

• Position: From The Founder

Republicans, giddy and gloating, are understandably proud of the outcome of the November election. Democrats living between Boston and the District of Columbia are on a 24-hour suicide watch. Yet lest the GOP euphoria get out of hand, consider the fact that the next four years could be challenging in ways never imagined. No, I'm not talking just about enacting the President's domestic agenda, filling court vacancies, or democratizing Iraq. The far greater challenge may come in mastering the global economic Rubik's Cube in a world dramatically more financially integrated than even when the President's father was in office. No surprise event, sudden imbalance, or price shock occurs anymore in a vacuum. Worse, a lot of the reliable solutions may no longer suffice. Even the experts themselves often are in dispute.

Begin with the price of oil. Some optimistic experts suggest a return to the high $20 level, but even more make a case for why oil could jump to $60 and stay there. Philip Verleger, an important expert at the Institute for International Economics, thinks so (p. 22) but ominously goes further: "The situation ... today bears a remarkable similarity to the one observed in the late 1960s."

While $60 oil ain't beanbag from a U.S. standpoint, it would be devastating for China, probably collapsing its banking system. And why is that important to America and thus the world? The U.S. budget deficit is large and its current account imbalance, according to the Federal Reserve, will soon approach 6.5 percent of GDP. David Hale (p. 16) argues that the newest source of funding for this imbalance--in other words, the funding that helps keep U.S. interest rates low--is commodity-producing countries that have benefitted from the impact of China's economic boom on their export prices. In any event, the future of the U.S. dollar and exchange rate stability throughout the G7 could depend on the longevity of the Chinese boom.

Again, some experts see China booming for as far as the eye can see. Yet a growing number are beginning to predict trouble ahead, starting with the failure of Chinese consumption in recent years to underpin overall growth. Is a Chinese investment-led bubble about to burst, producing an economy soon in the midst of a boom-bust cycle? Japanese analysts, including Tadashi Nakamae (p. 10), are already writing that the Chinese economy today is reminiscent of the fragile Japanese economy in 1973. Pippa Malmgren (p. 20) writes about the...