The global economy is rebalancing down, as the stresses on the developed economies have increased. Odds therefore favor a global growth recession rather than a full-scale global recession, according to BNY Mellon Chief EconomistRichard B. Hoeyin hisSeptember 2011Economic Update.

"The key to the global economic outlook is whether the resolution of the European financial stresses evolves in an orderly, semi-orderly or disorderly way," Hoey states. "We expect a semi-orderly pattern, which should be consistent with a global slowdown at a subdued pace rather than a full-scale global recession."

Hoey regards the global economy as fundamentally recuperative after the Great Recession, but vulnerable to shocks since private sector deleveraging and fiscal consolidation in developed countries is not yet complete.

"Our interpretation is that the U.S. is 'short-funding' a persistent U.S. budget deficit rather than financing it by the sale of long-term bonds to the private sector," Hoey says. "We view the sale of new bonds by the Treasury followed by Federal Reserve purchases of Treasury bonds in the secondary market as the Federal government selling bonds to itself. After all, the profits of the Fed flow to the Treasury. At some point in the future, persistent deficits will need to be funded by increased sale (net of Fed purchases) of long-term Treasury bonds to the private sector."

"The Federal Reserve has now taken responsibility for the yield on long-term Treasury bonds, some 60 years after it won its independence from the need to support the long-term Treasury market," Hoey concludes.