Thursday, 2 April 2009

Does future global prosperity need "voracious" American consumers?

During a press conference at Number 10 Downing Street following his breakfast with Prime Minister Brown, US President Obama made the comment that the world should no longer rely on "voracious American consumers" to power economic growth in the future.

We shall have to wait and see just how much the "animal spirits" of the American public are restored to the status quo ante when we eventually emerge from the Great Recession but there is a very biq question associated with Mr. Obama's remark.

As has been widely observed there are major imbalances in the global economy between on the one hand the major demand economies such as the US and UK and the major supply economies such as Germany, China and Japan. In a nutshell the demand economies consume too much and finance their appetites for all things nice from the supply economies by effectively borrowing from those countries with high rates of savings which often coincides with those very same supply economies.

Just to take one example has the German Chancellor really come to terms with the consequences for her manufacturing industries if the level of demand from US consumers for German cars and luxury goods does not return to 2005-7 levels?

There are of course larger issues that begin to surface in regard to Mr. Obama's cautionary remark - for example, what kind of engine is going to provide the cornerstone of economic growth in the future? There also numerous questions that can now be addressed in hindsight, but which should have been more carefully pondered at the time, as to how sustainable the voracity of US consumers was given that much of the demand was coming from mistaken beliefs as to their own affluence. But that's for another post.

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