"Theoretically at least, our government has the tools it needs to boost domestic demand and thereby increase production. "

James Kwak on The Baseline Scenario with a good post:

"The steep decline in U.S. consumer spending is clearly taking its toll on the U.S. economy. But still, the U.S. has one advantage over many of its trading partners. Theoretically at least, our government has the tools it needs to boost domestic demand and thereby increase production( TRUE ). This is not true of the many countries who depend on exports for a large share of their economic growth( TRUE ).

I was taking a tour of the world’s news today and came across the following (courtesy of the FT):

• Japanese exports fell 27% year-over-year in November, the largest fall ever; remember, exports were a major reason Japan finally emerged from its decade-long slump a few years ago.
• Thai exports fell 19% year-over-year in November, the first decline since 2002 - and exports make up 70% of GDP. The numbers may have been artificially reduced by political conflict in late November, but political conflict is hardly a good thing in itself.
• China is looking less and less like the big winner of the global recession and more and more like a significant loser. 10 million migrant workers have lost their jobs by the end of November. In response, “the State Council, China’s highest governing body, issued a decree to local governments over the weekend ordering them to create jobs for migrant workers who had returned to their home towns.” Prime Minister Wen Jiabao went as far as saying that a government priority is to “make sure all graduates have somewhere constructive to direct their energy” - somewhere other than social protest, that is.( TRUE )
  

One of the challenges of an export-driven economy is that when your consumers (Americans and Europeans) stop buying, you have few direct tools to get them buying again. There has been speculation that China could take the opportunity to stimulate domestic consumption and shift its economy away from reliance on exports, but that clearly can’t happen fast enough( THEY SHOULD DO THIS THOUGH, EVEN THOUGH IT WILL BE HARD ). Another trick exporters can use is to devalue their currencies, but that will crimp domestic purchasing power and potentially lead to a round of competitive devaluations, with wealthy countries printing money in an effort to stave off deflation and thereby devaluing their own currencies( TRUE ). In the meantime, everyone will be watching the Obama stimulus plan carefully."

They hope that we will return to spending. That's the whole joke of what's occurring: The Saver Countries want the Spender Countries to keep spending. It's hard for me to see this changing. Instead, I wonder if a new way to allow this exchange to continue will emerge. Getting Saver Countries to spend and Spender Countries to save isn't impossible, but it seems to be awfully hard without everyone going down in flames and becoming Saver Countries by necessity.