Obama´s speech was again full of encouraging rhetorics and I in principal agree with his views on how to spend the money of the stimulus especially if it comes to energy policy and health care. He also mentions the long term goal of fiscal discipline after the crisis which I think shows that Obama indeed has some long term policy goals in mind. However, I still think that most of the politicians and many economists do not realize or for psychological reasons do not publish their views on how severe and persistent this downturn is. That includes the Obama administration.
I believe that the American supremacy both in political and economic terms is drawing to a close in the not so far future. Nevertheless, the global faith of the global economy is very much depending on the United States of America right now. I oversimplify the world a bit and divide the major actors in two groups: there are the consumer-demand driven economies (e.g. US, UK, Spain, Ireland) and the export driven economies (e.g. most emerging markets in particular China, Germany). It is hereby not so important which group a specific country falls into and some stand certainly somewhat in the middle. The system developed by those two groups worked quite well. The exporters gave the consumers money to buy their products. This created huge global imbalances (e.g the often cited twin deficit of the U.S, which should actually be named triplet deficit adding the debt of private households) could not go on forever as many economists have warned for a long time. Those global imbalances are next to the obvious credit crunch that triggered the recession one of the reasons why the crisis might persist longer than expected. Because: again, where will the growth come from?
The exporters shrink because their export markets shrink. Their way out is to strengthen domestic demand which can at best ease the pain of the breaking away of the export markets. The only economy which is taking a comprehensive approach to try to manage this shift and strengthen domestic demand in a non-protectionist way is right now China. By the way, I think, humanitarian issues taken aside, the Chinese political leadership peruses very wise long-run economic policies. However, this will not save the world economy. China’s economy is simply too small to have a sustainable affect.
What can the second group do? Revive their domestic demand as well. Is this likely to happen? Not at all as the consumers are already highly indebted and the current panic does not encourage them to take on more debt; rather the opposite will happen and private households will pay pack their debts; in economic terms the private sector will save. The U.S saving rate was down to zero, what is economically not sustainable and will have to go up. The government stimulus measures will have a hard time to overcompensate this saving, in fact I regard it as highly unlikely and I bet this package will not be the last in this recession.
So if both groups are struggling to find a bottom, what is the answer, who will save the world economy? The answer is time which is more or less equivalent with nobody. The excessive spending of the past has to be gradually reversed and this will take time. It is as simple as that. How much time? I am not a prophet, but longer then many want to imagine. Five years is not unrealistic, look at Japan; they lost a whole decade. To get back to the start and Mr. Obama´s address about his post crisis plans: an American president has eight years at the most if he gets reelected and time will show how much of those eight years will be in the post crisis period.
