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"That is why the world economy is not yet out of the woods"


Rebalancing global growth
Before the financial crash, global demand was horribly skewed. It was far too reliant on spending from increasingly indebted American consumers:
witness the country’s gaping current-account deficit, which reached almost 6% of GDP in 2006.
The Economist print July 23rd 2009

The crisis—particularly the credit crunch and the destruction of more than $13 trillion of household wealth—has wrecked the American shopping machine and changed the nature of the world’s imbalances.
As consumer spending has slumped, the external imbalances have shrivelled.
America’s current-account deficit this year is likely to be less than 3% of GDP

Rebalancing via recession is hardly to be recommended.

We will examine the task in a series of articles on the world’s four biggest economies, beginning this week with America’s (see article).

The shift in mindset is most necessary in surplus economies. Too many German leaders seem to take the economy’s export orientation as immutable. Few even grasp the need to nudge it towards domestic spending

nvestment in services, by freeing markets from health care to education. America must counter the rigidities that have arisen after its asset bust.
Millions of people with negative equity in their homes, for instance, cannot move to get a new job.

Full text


Congressional Budget Office (CBO) predicts the deficit will be $1.8 trillion this year.
This is bearable given the scale of the recession;
the real problem is that it will decline only to $1.2 trillion by 2019, still a horrendous 5.5% of GDP.

There are other ways to reduce the deficit, including getting rid of the mortgage-interest deduction, raising the age of eligibility for Medicare and Social Security, altering the inflation-indexation formula, or proposing some sort of tax reform that raises additional revenue.