Global Meltdown, Redux: Is it 2009, All Over Again?

Across China, Europe, and the United States, an alarming, synchronized slowdown is underway. The poisons from the Great Recession haven't worked their way out of the global economy.

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In the annals of world economic experience, 2009 was a terrible year. It was the first since 1945 in which global economic output contracted in aggregate.

Now, just three years later, we are on the verge of the same happening again. Data releases from around the world last week suggest an alarming, synchronized slowdown is underway. Another global recession so soon after the last one, at a time when an intractable debt crisis is tearing Europe apart while a divided United States is still reeling from the 2008-2009 financial meltdown, could easily undermine international trade relations and even threaten world peace.

This synchronicity is no accident. It is rooted in the problem of global economic imbalances, the same issue that had a heavy hand in the previous crisis. Simply put, this concept describes a world in which economies such as China's and Germany's run overly high savings ratings and depend on exports for growth while debtor nations such as the United States and those of peripheral Europe depend too much on consumption and imports. This imbalance created what Federal Reserve Chairman identified in 2005 as the "global savings glut," a giant, international pool of funds that fueled the debt bubbles of the pre-crisis era in the U.S. and Europe.


These imbalances did not arise organically. They were encouraged by the United States' post-Cold War mania for financial deregulation, by Chinese social and monetary policies that forced people to save at punitively low interest rates and which set the exchange rate to exporters' advantage, and by European leaders' blindness to the risks of creating a monetary union without the equivalent political or fiscal unity. Together, this mix of misaligned policies gave rise to a highly liquid global financial system in which giant, multinational banks grew so large that they fueled fears of systemic collapse, leaving policymakers paralyzed by their "Too Big to Fail" status when the party ended.

After the crisis, governments paid lip service to correcting these imbalances. But other than a few token agreements at G20 summits, the opportunity for a re-balancing was squandered. In fact, what countries on either side of the imbalance did was to double down their bets on the old, flawed system.

China, faced with the sharp declines in its U.S. and European export markets and with the need to produce jobs for millions of annual new entrants into the labor force, fixed its exchange rate at an artificially weak level and unleashed even more of its financially repressed savers' money to fund an unprecedented construction boom. It built high-speed rail networks, office and housing towers, airports and other projects at a breakneck pace. Initially, this succeeded in rapidly restoring growth to the 10% levels China had become used to. But instead of re-balancing its economic model toward consumption-led growth, it made China dependent on an unstoppable treadmill of investment, a trend that perpetually raised the bar ever higher for the consumer-based society it planned to have in the future, whose spending would now have to rise even higher if all the empty apartments or bullet train seats were to be filled. In the end the speculative bubble scared Chinese authorities, as did an outbreak of inflation. So they eventually tightened monetary conditions by letting both the exchange rate and interest rates rise. This slowed the economy to the extent that the world is now worrying about a downturn in Chinese demand--especially foreign producers of the commodities with which China has fueled its construction boom.

Presented by

Michael Casey, the author of The Unfair Trade, is a managing editor covering global financial markets at Dow Jones and The Wall Street Journal.

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