LONDON, Dec. 29 (UPI) -- The cheerful lesson from London's post-Christmas sales is that there is still money about -- if the price is right. The giant Selfridge's department store on Oxford Street saw 10,000 shoppers an hour streaming in, hunting the widely advertised price cuts of up to 75 percent. The John Lewis group claimed to have had its best-ever day for sales.
These shafts of light come amid a series of gloomy announcements of British and European retail companies "going into administration" (the British version of a Chapter 11 bankruptcy), of rising unemployment and shrinking output. The huge Zavvi chain, which sells music and DVDs in Britain's high streets (and used to be Virgin Megastores), went into administration last week.
And some of the top forecasters are equally gloomy. Nouriel Roubini, now known as "Doctor Doom" after his early prediction of the housing bubble turning into a credit crunch and a deep recession, is now predicting that the misery will continue throughout 2009.
Roubini's gloomy views are well known to the incoming Obama administration. He worked in the U.S. Treasury during the Clinton administration as senior adviser to Tim Geithner, now Obama's nominee as treasury secretary. And a number of other senior figures in the Obama team, led by former Federal Reserve Chairman Paul Volcker, agree with Roubini that this is now a deep and prolonged global recession with no immediate exit.
So if Roubini is at the gloomy end of economic predictions for the coming year (and it should be said there are some even gloomier who speak of a new global depression), then Olivier Blanchard, chief economist of the International Monetary Fund, is now at the cheerful end. Blanchard, who is also a professor of economics at MIT, thinks recovery could be under way by the end of the year, with the right fiscal policies.
"Governments must counteract the sharp drop in consumption and investment demand," Blanchard argues in a paper released just before Christmas. "In countries in which there is fiscal space, they must announce credible fiscal expansions; we -- the IMF -- believe that, as a whole, a global fiscal expansion about 2 percent of world GDP is both feasible and appropriate."
Two percent of world GDP is just over $1 trillion -- the sum that the United States alone looks ready to deploy under the Obama team's planned stimulus package. But the world looks poised to spend far more than this. Including the Obama plan and China's announced $586 billion package, the total of announced stimulus plans around the world is now just over $2 trillion.
There are some problems with this. Much of the money is not what it seems. The Chinese package includes money already budgeted for plans announced long ago and money that the town and regional administrations are supposed to spend but they claim not to have. Much of the French money seems to be part of a fund whose real purpose is to buy up shares of big French companies to prevent them being bought cheaply by foreigners.
A great deal of the money is likely to be wasted because the infrastructure investment will not be sensibly planned. In the United States, for example, most states and cities have "shovel ready" plans that can be started almost at once if the federal government provides the money. But these plans will seldom be coordinated so that bridges match up with roads in the next state, or modernized ports feed into a more rationally planned rail system.
Still, even if the real amount of money to be injected into the global economy this year is just half of the promised $2 trillion, it is enough to meet Blanchard's IMG recommendation. It is a great wall, a tsunami of money, and even if it does not wash away the recession it should have a potent effect.
Simply by pumping money into their economies, governments can make a big difference if -- and only if -- banks start lending again so that companies can start hiring and buying the raw materials and leasing the bulldozers they will need.
So far, the reluctance of banks to lend has been the weak point of the various government measures. The banks have been rescued and guaranteed and refinanced in the United States and Europe and Japan. But the banks are still hoarding money because they don't trust commercial borrowers, they don't trust other banks, and they know that there are more mortgage losses coming this year, so they want to keep up their capital reserves.
Blanchard understands this and allows for it, arguing in effect that governments will have to do whatever it takes to restart the sluggish credit markets.
"Governments must indicate that, if conditions deteriorate, further fiscal expansion will be implemented," he insists. "Only with such a commitment will people and firms be confident that we are not headed for a repeat of the Great Depression, and start spending again."
The economy of 2009 will unfold somewhere between Roubini's gloom and Blanchard's relative optimism. But remember that message from the London sales, that there is lots of money out there if the price is right. In the end, that is how all recessions end; once prices fall sufficiently, people start to buy again. And the irony of the kind of government intervention that Blanchard advocates is that it can delay that process by propping up prices (and companies) that should be falling.
