The key to economic recovery is boosting global demand

[CHIMO]

Correcting imbalances in the world economy is widely believed to be critical for long-term economic recovery, but discussions on this issue have overemphasised US-China relations, especially the Chinese currency. This has diverted attention from the real issue: there is insufficient effective demand globally. For the world economy to recover, there has to be a boost to global demand while avoiding new financial bubbles.

Recent analysis by South Centre on the extent to which major economies are contributing to global demand and what policy reforms they should undertake points to one finding: the main solution lies in national policies designed to address overconsumption in the US and underconsumption in countries running a surplus.

The US economy, with its problems of overconsumption, high household debt and trade deficit, has to adjust. To address its imbalances, it has to simultaneously reduce consumption and increase exports, while improving financial stability and avoiding new financial bubbles. This adjustment may, however, cause its own problems for many developing countries, as it could result in increased interest rates (bad for indebted countries) and a higher dollar (exerting a downward pressure on currencies in countries in deficit).

Germany and Japan also have to play a more positive global role. These countries, such as China, have been having large current account surpluses (7.5% of GDP in Germany and 4.8% in Japan, before the crisis), but the contribution of Japan and Germany to global demand and growth is much smaller than China's, and their reliance on exports is much greater. Japan's trade surplus with the US is higher than China's, in value-added terms. Moreover Japan, and particularly Germany, have been siphoning global demand without adding much to global growth. Underconsumption then becomes a major problem: in Germany, there has been high unemployment and stagnant wages because of an over-focus on price stability. In both countries, the share of wages has fallen, thus suppressing consumption: these two countries need to increase their contribution to global demand by expanding their domestic consumption through faster wage growth. This would spur more imports and reduce their trade surplus, which would contribute to other countries' exports and GDP growth.

http://www.guardian.co.uk/commentisfree/2010/apr/23/global-economy-boost-demand-economic-recovery

[jtuck004]

1. This is kinda funny - we need to reduce our consumption and increase

our exports so that we get a better economy. Because we have let much of our economic growth move to the finance sector, and many of our businesses have been decimated by the growth of multi-nationals, monopolies, and the movement of our manufacturing base outside of our borders, increases in consumption overseas won't help Main Street much at all, but will do a lot for the bottom-line of multinationals and financiers - check out Coca Cola. Consumption is down in the U.S., yet their sales and profits are up, because the markets overseas are drinking more. They sell more over there and their profits increase, their stocks increase, but that ain't gonna put tax money into state coffers here. Lots of companies like that.

And then the article suggests that Germany, who has been putting out good stuff, paying attention to their local business, and, in general doing what the U.S. should have been doing, should start consuming more and selling less so WE can recover from our our greed and excesses? That's pretty funny. The only winner in all this is China, with a growing number of consumers coming on line, lax environmental controls, and cheap, cheap labor.

I do understand the points in the article, but until we start manufacturing from here, actually creating wealth, break up some of the monopolies and switch our policies from being less friendly to finance and more friendly to Main Street, and start educating a lot of people at very low cost we are going to continue this long slide to the bottom - the only excitement will be the sudden drops we get from disasters and energy shortages, with stupid little bubbles in between. This could change with an unforseen technological development that brings us cheaper power, better food, etc, that we could turn into wealth, but there are no indications of that anywhere on the horizon. 20 years of double digit unemployment and decreasing lifestyles ahead...

I would really like to think that if Obama got off his ass and pushed for business (manufacturing) incubators, low-cost public business and engineering education, etc that we could turn this around, but I don't think he is the guy, and may well be too dang friendly with the finance folks. Which doesn't bode well for the next few elections, 'cause we get people in who think the government can stop spending and lower taxes to stimulate this big piece of crap we have called an economy and that will just turn it all off. That could lead us to religious or teabagger folks actually taking it away from the Rpubs, and then war in the streets...unless we run out of oil (or some other really big life-altering calamity) b4 then, and it all gets accelerated.