Andrew Golis twitters, “assuming (for sake of arg) the stimulus stops the bleeding, what replaces the actual day to day GDP lost in finance and housing.” If I were twittering back, I'd probably says, "nothing totally replaces it. Consumption will be lower." But I'm not Twittering. I'm blogging. So: More words! There are a lot of ways to tell the capsule story of the past few years, but one of the better summaries is simply this: Money got too cheap. Martin Wolf tells this story well in his book Fixing Global Finance
. Emerging economies had learned in recent years that running current account deficits triggered massive currency crises. So they stopped running deficits. They kept their currencies at low levels to stimulate exports. The policy worked and they ran large surpluses. But that money had to go somewhere. And it largely went into the U.S, which Wolf argues became the global bank of last resort. He estimates that American consumer spending absorbed 70 percent of the global savings glut. That money had to be spent, and so the financial industry set about figuring out how to make consumers more willing to spend it. I've heard economists refer to the last few years -- not just the subprime crash -- as, alternatively, the "credit" or "cheap money" bubbles, and both sound about right. Americans had to figure out what to do with the money being pumped into our system. That task fell to the financial industry. Credit cheapened. Mortgage rates plummeted. The savings rate fell. We've had a long period in which median wages have stagnated but consumption continued to rise rapidly. That was fueled, largely, by credit. But it was a bubble. It has popped, and it's unlikely to return, at least with the same size and ferocity. So to come back to Andrew's original question: What replaces the bubble-fueled consumption of the past few years? The answer, as I understand it, is nothing. For the past few years, we've been growing like a developed economy but spending as if we were growing like a developing economy. That's over now, and no similarly unsustainable bubble is likely to replace it. So though the immediate problem is getting out of recession, the longer-term question is how we adjust to an economy with a rate of consumption more naturally aligned with the fundamentals of the American, rather than Asian, economies.
