Good economic news keeps on flocking in. Yet, there is increasing chatter at the highest levels in the U.S. that the first stimulus package may have been much too small. A second one is needed, but that will take a long battle. The good news and the chatter seem to be in a stark mismatch and this foreshadows what 2010 is likely going to look like: The fight between prep-talk and the reality that American consumers won’t return to living above their means anytime soon. On the other hand, the American Presidency is going to be sandwiched between 15 million unemployed and its inability to keep deficits at a level in excess of 10 % of GDP. At the same time, the capabilities of the Federal Reserve are maxxed out and they sit on a pile of worthless mortgage backed securities. Unless the American consumer spending returns to solid growth, America faces unsurpassed problems: debt service and interest obligations that over $1 trillion annually, $2 trillion deficit to be financed, and a cost explosion in medicare and social security from the aging baby boomers. It will have two consequences: raising interest rates and a falling dollar. 2010 will likely choke the hopes for a sustained recovery. The underlying erroneous assumption is that consumers have to somehow, miraculously be forced back into spending more than what they can afford. Hint: look at gold (and my articles from back in May and September setting the bar to $ 1,200 by the end of the year). Instead of the promise of Change, America is now worse off than at the outset of the economic crisis.

However, this is an interconnected world where everyone can source anything from anywhere. Good news is coming from Germany that has returned to growth with its built-in automatic stimulus with its unemployment insurance and reduced work compensation. However, the real growth 'stimulus' comes from a healthy consumer base that did not bury themselves in debt and is confident to spend. The same holds true for the Swiss, the French, and the Nordic countries. Their social insurance mentality kept income levels artificially high while unemployment is even higher. Italy, Greece, Spain and Portugal fare worse with shocking unemployment and state finances in sheer distress. Europe’s black sheep is England, America’s role model of the former Empire that Great Britain used to be before it drowned in decadence and debt. The eastern European countries and Iceland can probably be named in one sentence with no objection. High unemployment will ensure government officials clapping their shoulders when its numbers drop by a tenth of a percentage.

If all fails, we still have China to lend a helping hand to everyone. The trick with China is that we don’t know what’s real. Their numbers have been cooked for the last 25 years and counting. What the Greeks have been doing with their numbers, the Chinese can do even better. It is a little bit like the West is relying on Santa Claus. The trade deficits of all other nations show that China is actually improving its export strength in the shrinking environment. Obviously, the Chinese have recognized their vulnerability with a lack of domestic economy and have launched a massive stimulus package. In its wake, as unreal as it may sound, China is currently in the midst of a credit boom, which prompts its government to raise requirements for banking reserves. The idea behind this move is not so much banking stability but much more their ability to lend even more. This year has shown Chinese domestic lending balloon to as much as the last two years combined. It is obvious that the Chinese lending frenzy is state driven aiming at pushing domestic consumption. Next year will see even more and the Chinese will consequently have to hold on to their cash reserves rather than handing them over to the U.S. With the recent history of the economic crisis in the rest of the world, raising banking requirements is probably a smart move and will help to avoid an upcoming real estate bust. Yet, any other country could probably not follow suit with tightening banking regulations without curbing lending even more. In other words, China is in a unique position where it still commands over options. If they manage to restructure their economy to be less reliant on exports and stronger on national consumption, China may come out ahead of everybody else. The West may have something to learn from them.

Here is a hint for the slumbering American administration why 15 million unemployed are unacceptable: Through their wages alone, they account for at least half a trillion ($500 billion) in direct economic loss or over 3% of GDP respectively over 5% of consumption. Focus on those with whatever it takes and consumer spending can rise substantially. Use the military, local and state governments and other public services to employ as many as possible. If the streets are cleaned twice a day, so be it. Then submit imports to American safety, labour and environmental standards in order to bring manufacturing home rapidly. In other words: for once, do something for the American families.

For those that are crying out ‘Socialist’ or think that shifting manufacturing home will hurt the developing world, please go and browse my previous articles first. However, to stand by a humanitarian disaster of this magnitude and do nothing is not only an unacceptable disgrace in the name of the free world but it chops away on the very foundation of the American liberties and Democracy.

H.R. Tschudi, economist and entrepreneur, Vancouver