recent data in the US and Japan and financial turbulence in Europe suggest a fresh global recession is a distinct possibility in 2011. If that happens, what levers are realistically available to revive demand? Interest rates are already at, or close to, zero. That leaves increased government spending as the only real way to stabilize things.What worries lots of doomsters is that the world might be heading for 1937 again where Roosevelt and many others felt the recession was over and relaxed only for the US economy to go backwards the following year.
The trouble is, there’s little support for opening the fiscal floodgates in a meaningful way.
One reason is that there’s already loads of public debt out there.
As with my previous post a real question for coming years is how long China can continue to grow without expanding demand for its exports from the US and Europe.
If Sakakibara is right, the global economy is in deep trouble. He envisions a broad slowdown that might drag on for seven to eight years. China can live a couple of years without US and European growth, but eight?The problem for the US on the other hand is the extent of financial vulnerability due to foreign holdings of its bonds.
To head it off, governments need to up spending. And, for the most part, they aren’t. Yet the US can, and should, borrow more. To do that, it just needs to become a bit more Japanese, says Richard Duncan, author of the “The Corruption of Capitalism.”
There’s a single reason why Japan’s 10-year bond yields are below 1.3 per cent and Asia’s No. 2 economy isn’t being downgraded. Since about 95 per cent of Japan’s debt is held domestically, there’s no risk of capital flight. Japan borrows from its companies and people, an arrangement that’s roughly the mirror image of the US.
That so many Treasuries are held in China and elsewhere makes the US highly vulnerable. Duncan, chief economist at Blackhorse Asset Management in Singapore, says the US needs another FDR-like New Deal to restore growth and competitiveness. Funding one means greater borrowing and the way to do it is by tapping private-sector cash, Japan-style.For a more local prediction of possible doom see one of my favourite bloggers Leith van Onselen, who highlights China's empty cities and what they might mean for Chinese demand for Australian resources when the Chinese have to EVENTUALLY stop building stuff no one is buying.
Such suggestions are likely to fall with a mighty thud on Capitol Hill, which is moving in the opposite direction. Lawmakers calling for Ben Bernanke’s head forget why the Fed chairman is taking US monetary policy into uncharted territory. It’s because Congress failed to pump enough money into the economy in the first place.
Japan is a cautionary tale. On the surface, the 4.5 per cent annualized increase in third-quarter gross domestic product looked promising. The detail, however, showed that deflation is worsening no matter how many yen the Bank of Japan churns into the economy. This is anything but a typical recession, and world leaders are too distracted to see it.
In the US, the focus is on China’s currency. While a stronger yuan would be in the best interests of the global economy, it’s not the answer to all the US problems. Japan is even more obsessed with exchange rates. And Europe is linearly focused on convincing investors that the euro zone won’t unravel.
In our time of currency fixation, perhaps a guy called Mr. Yen is the ideal messenger. Too bad his message is one of economic gloom as far as the eye can see. Perhaps even to 2018.