Monday, June 15, 2009

As the US demands less, can the world demand more?

A report today by the IMF, concludes with an advisory that the US should not be counted upon to continue as the “global ‘buyer of last resort.’”

This claim is by no means new. Yet coming from a multi-national development institution that has long relied upon the United States to provide a bulk of its funding it takes on new urgency. In particular President Obama pledged a new $100 billion US contribution to the IMF earlier this year. (I commented on the implications of this injection for IMF voting in a previous post.)

Yet it’s unclear which, if any, country is ready to take upon the role the US played in driving global demand. The ideal candidate would be a large growing economy. Yet the biggest players have serious problems. China is known for its high personal savings rate. Plus, as CFR’s Brad Setser pointed out over the weekend much of the current growth in Chinese demand has been focused on domestic production, a trend that is likely to continue as long as the yuan is pegged to a basket of currencies in an attempt to encourage cheap exports.

India’s consumer economy may be more robust but like China it’s found domestic producers for a great many products. Indians may be beginning to drive but don’t expect to see many of them in Fords; they have Tata and other regional players.

When it comes to reliance on US demand, paraphrasing Churchill may be most helpful. It’s the worst system around, except that we have no other to try.

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