Happily, Mr Obama has the authority needed to lead the world towards a resolution: his hands are clean, and his lack of desire to exculpate his country is evident. It is also in the interest of his country and the world that the world economy be put on a sounder footing. Should this effort fail, I fear a resurgence of protectionism will be the outcome.
What then is the global failure? It is the malign interaction between some countries' propensity towards chronic excess supply and other countries' opposite propensity towards excess demand. This is the theme of my book Fixing Global Finance. But the biggest point about the world economy today is that the credit-fuelled household borrowing that supported the excess demand in deficit countries has come to a sudden stop. Unless this is reversed, excess supply of surplus countries must also collapse. This statement follows as a matter of logic: at world level, supply must equal demand. The question is only how the adjustment occurs.
Michael Pettis of Peking University laid out the argument in the Financial Times on December 14 2008. Prof Pettis sees the world as divided into two economic camps: in one are countries with elastic systems of consumer finance and high consumption; in the other are countries with high savings and investment. The US is the most important example of the former. China is the most significant example of the latter. Spain, the UK and Australia were mini versions of the US; Germany and Japan are mature versions of contemporary China.