The "how bad?" question

UNITED STATES: "Spending and the economy: The end of the affair; America's return to thrift presages a long and deep recession," The Economist, 22 November 2008.

ARTICLE: "Great Engine of China Slows: A Global Downturn Puts the Brakes On an Economic Boom," by David Barboza, New York Times, 26 November 2008.

ASIA: "Asian economies: Sittin' on the dock of a bay; Trade slows and gloom mounts. But Asia's economic downturn will be milder than the one it endured a decade ago," The Economist, 22 November 2008.

We seem caught in Keynes's "paradox of thrift," in which everybody's desire to save (or deleverage, in the case of Americans) means nobody wants to spend, thus triggering more dire overall economic conditions, thus strengthening the save vibe and a vicious circle is created.

When the American consumer is thus disabled, and the rest of the Old Core, predictably enough, precedes us in our distress and new monetary vigilance, then we're suddenly down to the New Core to rescue us with their spending. Problem is, of course, that their economies are largely export-driven, with the Old West as the primary markets, so our slowdown becomes their own--unless . . .

Unless they can sustain demand on their own.

This is the essential conundrum we face: the Bretton Woods II--as some dub it--informal arrangement by which the U.S. spends and Asia exports and we cover global security on the side in order to allow Asia's peaceful rise has come to its natural end--cataclysmically, of course, as long-term economic habits are wont to do.

So the prognosis is dire for now, absent the Old Core making big stimuli happen, for we are chicken to the New Core's egg (sorry, it doesn't get any more conclusive than that).

If the global economy--now truly near-global (with only the bottom billion truly disconnected)--ever needed some Keynesian leadership, now is it, with the conventional wisdom (always dangerous) saying, better to spend too much than too little in our attempts to jump-start activity. Because, simply put, the American consumer is feeling trapped and that feeling is unlikely to lift for quite some time.

Of course, our great Asian quasi-friend, China, is deeply motivated to "spend to save" itself right now, as every observer argues that anything less than 8% growth there (they have to create 24 million new jobs every year, or about 3x what Clinton did over eight years!) will lead to social tumult. So now, quite suddenly, they know what to do with their $2T in U.S. dollar reserves. The fear there, of course, is the lack of oversight and proper market mechanisms to make all that spending happen sensibly.

But act Beijing must, because predictions are that the economy drops from 10% growth to 5% fairly fast, and as that drop unfolds, excess supply will emerge across the dial--thus unemployment will rise. So yeah, I expect the CCP to cough up more than $600B.

Strike you as a future where China and the United States logically take time out for a war over resources? Much less Taiwan?

Now the intense logic of our interconnected economic fates becomes a lot more clear for a lot of people--at least those willing to learn finally.

But why, then, does the Economist say that the downturn in Asia won't be as bad as the 97-98 "flu." Was the flu that much worse than we remember, or is Asia really getting off easier?

Japan truly in recession (yet engaging in global M&A with all their cash, making out like bandits in a record year for mergers) and China halving its growth. Hong Kong and Singapore, befitting their high-end economies , are already in recession too. Plus the whole place is so reliant on exports.

So where is the love in this picture?

Well, 97-98 was really bad, with 6% drops in GDP in the tigers, and nobody's predicting that bad this time--for now. Most predictions say flat or slightly negative growth. Only Taiwan is predicted to have a harder time than in 1998. India is less dependent on exports but has less government leeway on spending.

Better news: more state control over sectors means more ability to stimulate, and debt-to-GDP ratios are low in the region, so indulging their inner Keynes will be easier to do. Everyone is promising or shaping up stimulus packages, which oddly enough, constitutes, in many instances, just a speeding up of their planned infrastructure build-outs anyway.

All in all, the planned responses "are a far cry from 1997, when rather than urging households to spend, governments in Asia begged them to hand over their gold jewelry to be melted down to bolster official reserves."

Again, the short version seems to be: the Old Core West needs the New Core East to grow up and act like a mature market economy as quickly as possible, shedding the mercantilism and adopting the Keynesian mindset.

And that is a lot to ask.