The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis...
Main Street consumers have overspent and over-borrowed and are unable to meet their obligations...
Consumption has been above sustainable levels and needs to adjust down, whatever view one has about the responsibility of adults over their financial decisions.
The adjustment of private consumption to sustainable levels is necessary, but is likely to have a negative influence in the short run on the growth of aggregate demand... put downward pressure on world growth.
Sustainable growth is not the consequence of an unsustainable consumption boom but of the progress and diffusion of science, technology and innovation...
An efficient adjustment to the US over-consumption imbalance (and Chinese under-consumption) in a way that does not hurt longer-term growth should be based on compensating for the decline of US consumption with an increase in domestic investment and in consumption abroad. It should not be based on giving the US consumer more rope with which to hang himself... giving US households a $1,000 cheque by April, a trick that no macroeconomic textbook would argue is particularly effective...
This essay is extremely clear and paints a stark picture.
