Monday, January 26, 2009

Stimulus isn't enough: We need realignment

The Anglos had a party by living beyond their means, and Asia began to get rich while Germany got even richer. But the Anglo consumers were borrowing heavily against their credit cards and the equity in their houses to pay for the party. There was bound to be a moment when they couldn’t borrow any more. When it came last year, not only was their party over, but the whole world was suddenly plunged into crisis. It is because stimulus alone would simply perpetuate this unsustainable dynamic that rebalancing must be its companion.

This is easy to say, but readjusting aggregate global demand will be no easy task. Of course, the United States and the other deficit countries are already adjusting as their consumers stop buying and rediscover saving, hence their need for stimulus. But the surplus countries need to boost their domestic demand as well. Indeed, because they have excess production capacity that can no longer be easily exported, they actually need more stimulus than the trade deficit countries. And this is where things are getting very difficult.

That from the Smart Globalist.

In essence, we are paying excessive amounts of attention on the domestic situation. In reality, this problem is global in scope and is going to require economic cooperation on a hitherto unknown level to prevent crises like these from happening again. Unfortunately, it really looks like some nations don't want to play ball. Protectionism is on the rise, and nations like Germany don't even want to engage in fiscal stimulus (essentially meaning Germany will be free-riding on the backs of European and American taxpayers).

It's tough to imagine how this won't happen again in the future. We may be looking at the late 1800s and early 1900s all over again (which, of course, ended with the global economy getting shut down after depression, two world wars, and large trading barriers)

No comments: