Radical uncertainty about the international economy and volatile capital movements are the biggest risk to the global economy, despite signs that the underlying economy is re-stabilising, a prominent international economist Dr Robert Johnson has told a CEDA audience.

Giving the annual Copland Lecture, Dr Johnson, the Executive Director for the Institute of New Economic Thinking (INET), told CEDA that the view that government insures the wealthy and powerful but not society as a whole had led to a distrust of governments, central banks and capital markets.

"A massive stock of capital hanging over the world" - equal to 400 per cent of GDP in developed countries, 140 per cent in India and 220 per cent in China - was incredibly volatile, given growing uneasiness that central banks were no longer in charge of the international monetary system, Dr Johnson said.

The forum heard, the "political quagmire" in the United States, problems in Europe and Japan and concerns about the role of central banks in managing the recent financial crises, made a heady cocktail of uncertainty in the "International Monetary Non-System".

"When you put central banks into political controversy, their credibility and our capacity to understand their reaction function diminishes their capacity to guide the system," he said.

"I think that is the most dangerous thing that we have emerging in our uncertain architecture - but I hope I'm wrong."

Dr Johnson said the United States ought to have used fiscal policy to improve productivity rather than easing monetary policy to overcome the post-GFC recession.

This could have been used for infrastructure banks, long term investment, re-building education and a 20-year vision for science and research, he said.

While there were signs that the international economy was improving, the international monetary system was chronically imbalanced, he said.

China's approach to export-led growth and a devalued exchange rate contributed to deflation in the United States, he said.

Chinese production costs had become relatively more expensive - from about eight per cent of American unit labour costs to about 40 per cent - but China still has a huge advantage, he said.

China has attached itself "like a small dingy to a tug boat to be towed through exports and through imports of knowledge to a place where they can develop", Dr Johnson said.

"This is a suitable model for something the size of Taiwan or Finland or Israel, but what we have right now is an ocean liner sinking the tug boat and the western system with its dead overhangs really does not bear the weight of an undervalued Renminbi (RMB or tradeable Chinese currency)…very easily," he said.

Europe tended to set its own interest rates in reaction to where China set the RMB and the US set interest rates, setting European rates to reflect the central bank's aversion to inflation, Dr Johnson said.

This caused capital to flow to Europe, pushing up the European exchange rate and exacerbating deflationary pressure in the European periphery, he said.

Australia's long term prospects in the system with a commodity-driven economy boded well, but there were significant risks associated with dysfunction in the United States, the forum heard.

"Everyone is craving the riskless assets so what do the American geniuses do? They have a debt ceiling fight and threaten to default at a time when there is no reason to default and try to turn the riskless asset into a riskier asset," Dr Johnson said.