Another mind provoking post by Paul Krugman questioning what will take up the slack in the U.S. economy post-stimulus package. He first points to the components of GDP, specifically the increased role of consumption in the U.S. economy.
Lets go to Paul for a guess into how this will play out:
Source: NY Times: Conscience of a Liberal - After the Stimulus
Consumption probably isn’t going back to a 2007 share of GDP — savings are back. So what will fill the gap, once the stimulus is gone? Housing? Not for a long time. Business investment? Hard to see why. The natural thing would be to trade lower consumption for a smaller trade deficit.
But that’s going to be hard if the rest of the world is also in a slump, and in particular if emerging markets are facing currency crises.
What all this suggests — and it’s a very rough cut — is that our emergence from the era when massive fiscal stimulus is needed may hinge crucially on getting the world financial situation, not just our own, under control.