There is something not right about the world economy, or at least the older developed countries. The US seems to be doing reasonably well for now; but even here output is in any case still well below the pre-recession trend. The European economies are much further behind, which says something for the stimulus packages of the US administration, by comparison with the German-led sado-orthodox fiscal policies.
Lord Keynes set out a vision of world history in which there was a tendency for attempted savings to run ahead of perceived investment. He even formulated a “psychological law” that “changes in the rate of consumption are, in general in the same direction (though smaller in amount) as changes in the rate of income”. The result was a potential hole in the world economy with unnecessarily high unemployment. Various expedients helped to fill the hole. These included the building of pyramids and later cathedrals. For some decades after the second world war consumption did, contra-Keynes, seem to rise in line with income. But in the past few years all that has changed and Keynes’s psychological law seems to have re-emerged, opening up a gap between potential and actual output. What has happened? The cliché answer is the emergence of China, where a fantastically large proportion of its rapidly growing national income is said to be saved – more than can be invested domestically. “China” is of course a shorthand term for a group of high savings nations.
The important question is how the world deals with its excess savings potential. The first goody-goody answer is through the emergence of investment opportunities sufficient to absorb it. But these cannot be whisked into existence.
The second approach is the one taken for granted by classical economists before Keynes. That is to let ultra-low interest rates take the strain both by stimulating investment and discouraging saving. There was at one time a great argument among theoretical economists about whether these would suffice. What neither side predicted was that there would be a revolt against ultra-low rates by people – not just bankers – in search of yield, a revolt that precipitated dubious lending of all kinds, leading to the inevitable bust.
The third approach is to supplement low interest rates with more direct central bank action. These have weird and wonderful names such as quantitative easing. German officials are right to suggest that these amount to monetary financing of governments. But they are better than nothing.
The fourth approach is to recognise that if the private sector is spending too little this is an opportunity for fiscal stimulation: more public spending or provisional tax cuts. Needless to say, these are dangerous weapons that can boomerang in the long run – the long run in which “we are all dead”.
The fifth liberal-interventionist answer is international action against countries that save too much. Some commentators are trying to reignite the “scarce currency clause” in the 1944 Bretton Woods agreement, but which has never been used. We all hope that Chinese citizens will eventually insist on enjoying a higher proportion of their country’s new- found prosperity. But the thought of international sanctions to make them do so is beyond belief.
A sixth and perverse approach is backdoor protectionism. Barack Obama’s outburst against “outsourcing” and David Cameron’s fretting about military aircraft sales to India are of this nature. Do I have to add that at a world level these expedients are rightly known as “beggar-my-neighbour”?
A seventh and closely related false response depends on what is known as “lump of labour fallacies”. Governments and employers may try to share out available work by means of compulsory reductions in working time, earlier retirement and so on. Their net effect is likely to be to reduce purchasing power and do nothing to alleviate the problem of high-level stagnation.
The eighth approach is to attack so-called “inequality”. The argument here is simply that the poor and the middle classes spend more of their incomes. In practice too fierce an approach may discourage both investment and consumption.
The ninth and pessimistic answer is that some kind of balance is brought about by recessionary conditions. If these conditions persist long enough, productive potential is held back, investment and training are discouraged and austerity programmes seem vindicated.
What will happen? It will of course be a mixture of most of the above, with more perverse intervention and less financial stimulation than we would see in a rational world.
It's a good summary. Obviously there is no universal rule, and no matter what kind of measures is taken, the specific national condition must be taken into accounted.
In the natural course of things, if a country borrows too much it's currency should fall, making its citizen's poorer, less able to buy things and less able to take on debt, furthermore this drop in currency should make the country's exports more competitive and after some time the country will be selling more than it buys and be back in the black. This has not happened in our global economy. The US has become extremely indebted at every level of its society, from poor families to the federal government. The dollar is still mighty, no currency devaluation has occurred. The US workers have gotten no poorer and continue to take on debt, while their economy continues to become less competitive to emerging economies. Off shoring of jobs is the result, a scary experience for workers deep in debt. In the US, it seems only the most skilled have any hope of staying competitive and keeping their job in a secure way. Bruce Springsteen has been covering this topic for some time.
Thank you for your sharing. From my point of view ,the world 's economy recession is partly duo to the consumption shortage .On the one hand ,the european don 't have enough money .although they want to consume ,they have pay their bills .In order to make ends meet ,they must be cost -effective .While on the other hand ,Chinese keep a high saving ratio .Even the Chinese goverment have a large number of foreign currency .But they are good at asset management ,they have no choice but to buy amercian bonds . The Chinese people don 't want to consume is partly due to the weakness of Chinese social welfare system .Their saving is prepared for a rainy day ,such as sickness ,lay off ,etc .because of the shortage of consumption ,the situation of the world 's economy is still steep ,something must be down urgently to change the dilemma ,but it would be a long -term tough process
To summarize:
1、the emergence of investment opportunities
2、ultra-low interest rates
3、low interest rates with more direct central bank action，such as quantitative easing
4、fiscal policy: more public spending or provisional tax cuts
5、international action against saving too much
6、backdoor protectionism
7、lump of labour fallacies
8、attack “inequality”
9、resist recessionary conditions
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