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World economy column by Prof Barry Cooper

Independent of elections on this continent, the global credit problem continues to evolve across the world. But it is doing so in quite distinct ways in North America, in Europe, in Russia, and in East Asia. Moreover, patterns of response that reflect the cultural distinctiveness of the major players are beginning to emerge from the many flavours of anxiety and panic.

Let's start with the most important –us. Since 1945 the American economy, to which this province and the country beyond Alberta are joined at the hip, has been the guarantor of economic and financial stability in the world. In contrast to the 1990-91 bursting of the economic bubble in Japan –then the world's second largest economy— or the East Asian crisis of 1997, or the Russian crisis a year later, when the American (or to flatter ourselves, the North American) economy goes into spasm it affects everyone. American dominance is the basic reality of what the Marxists call the "world economic system" and the rest of us call globalization.

The American economy is in recession because its GDP has declined. That is what a recession is. All the economists' chatter about the "technical meaning" of a recession is of interest only to economists. The (preliminary) third quarter figure put the decline at 0.3 percent. Think about the derisory size of that decline given the recent financial turbulence, the long-term subprime problem, the continuing wars in Afghanistan and Iraq.

Considering that the US economy grew by 3 percent in the second quarter (and Canadian numbers were even more robust) between then and now we have decelerated by that amount. To normal, commonsensical observers, a three percent contraction that just barely puts the economy into recession is an indication of how strong, not how fragile, the economy is. Things will slow down for a while, but as Chauncey Gardiner told President Bobby in "Being There," there "will be growth in the spring."

Despite the fluctuations in the global markets, Wall Street and Bay Street seem to be returning to their historical growth pattern. If so, the reason is likely that the $700B bail-out package, with add-ons such as the recent currency swaps, has begun to unfreeze credit markets. That doesn't mean the crisis is over or the end is in sight.

Here we must note an additional consideration: North American consumer spending is the real engine of the world economy and solving the liquidity problem does not automatically restore consumer confidence. Indeed, last week consumer confidence numbers reached a new low the same day the Dow recorded its second largest increase ever. Interest rate cuts will help. What will help even more is if we all go on a shopping spree this holiday season. Max out those credit cards, folks, and things will get better faster!

In contrast to North America, where what happens depends on citizen-consumers, the other parts of the world have responded much differently. China's economic problem has nothing to do with banks and credit but with declining exports and an accompanying increase in internal political tensions. The plan to redistribute wealth from the prosperous coast to the impoverished hinterlands cannot be done without exports and money infusions. The Chinese government has a lot more to worry about than we do. Stay tuned for some serious political problems.

The Russians appear to be better off. On the one hand they have huge dollar reserves –around $600B despite the $150B in direct and indirect consequences that followed from the Georgian adventure. The Kremlin response has been first to compel the oligarchs to repatriate hundreds of millions in offshore cash and then to take control of selected banks and the pension system. The last is an interesting move since, with a life expectancy of 60.4 years, most Russian men have slim hopes of becoming pensioners. The bottom line: greater Kremlin control.

Not entirely without reason, the Europeans blame the crisis on the failure of American regulatory bodies. The French in particular see the solution in –no surprise here—more bureaucratic control over everything from accounting procedures to offshore holdings. In short, the Europeans want to Europeanize American financial markets, which seems unlikely in the extreme.

In all these responses, one thing is constant: the US has not lost its role in the world economy. If the Chinese or the Russians or the Europeans could fix things by themselves, they would. Because they can't, what happens on this continent in the next six months really matters.

Barry Cooper, PhD, FRSC
Professor of Political Science
University of Calgary

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