Global Economy Will not Pull America out of Depression

Posted by Michael A. Kamperman on July 24, 2009

For those thinking that the U.S. can ride the coat-tails of the global economy to recovery, think again.  GDP in the U.K. fell by a worse than expected .8% in the second quarter.  This dismal performance included the benefits of stimulus spending, .5% central bank interest rates, bank rescues, and quantitative easing.  In Spain, unemployment for the second quarter reached 17.9%.  Many Spanish construction workers are on a temporary status and are thus easier to lay-off than other workers in other parts of Europe.  Admittedly, those championing growth prospects in the rest of the world often refer to the emerging economic BRIC countries, especially China.  Well, in the first half of this year consumer price inflation fell 1.1% from the previous year.  This in spite of significant stimulus spending on public projects by the Chinese government and the government and the government’s insistence that state own banks ramp up lending.  The state owned banks supposedly doubled the lending rate from the year before.  While these actions created a second quarter growth rate in China of 7.9%, it is strange that China is experiencing deflation.  The rampant growth rates in China over the last several years have been accompanied by high single digit rates of inflation.  In fact, inflation had been a key concern for the Chinese government up until now.  To me, Chinese deflation is signaling a weakening Chinese consumer and a weakening Chinese private sector economy.

The Obama economic dream team needs to figure out how to generate internal demand, rather than chase after some pipe-dream of export led growth.  And the Federal Reserve needs to up its program of quantitative easing and print more money before deflationary forces take hold in the global psyche.  Once the desire to save replaces the desire to spend it could take a generation or two to reverse the psychic fabric of society.  The economic paradox we face is that while spending too much got us into our economic mess, it only by spending even more that we can get out of it.  Otherwise, the debts that are weighing down the economy will become even more difficult to deal with as global GDP shrinks and deflation decreases the value of assets and earnings.