Wednesday, December 21, 2011
Some things to keep in mind in thinking about 2012
Prior to the global financial crisis and the ensuing "balance sheet recession" — which I would call a modern depression instead, i.e., only the social safety net erected after the Great Depression has prevented a repeat — the driver of the global economy was US consumption, and the driver of that was the insatiable US consumer, most recently bolstered by an asset bubble in housing that no one believed could end.
That model has now collapsed and there is nothing in the offing to replace it absent a return to the status quo ante, which seems implausible anytime soon.
Where is the demand going to come from for global recovery? Who is going to step up if not the US consumer refueled by private debt? What firms are going to invest in the absence of rising demand? What banks are going to increase lending without rising incomes to support obligations? What governments seem likely to step up to fill the gap?