During the boom years, the US consumer, fueled by credit, kept the world economy going.
The formula for the boom was remarkably simple. Americans imported cheap consumer goods. The Chinese produced them. Japan and Germany produced the capital goods that furnished Chinese factories. The Middle East and Russia provided the oil products that kept everyone moving.
However, the formula also generated huge imbalances. The US ran up massive trade deficits that the rest of the world financed. The Chinese were particularly generous, recycling all their export profits back into the US, buying treasury bonds.
Since the summer, it has all gone pear-shaped. The US consumer has cut back their import demand dramatically. Since July 2008, monthly US imports of goods and services has fallen $69 billion. This has sent a powerful trade shock towards China, leading to a collapse of exports. Likewise, lower US import demand pulled away support for high oil prices, leading to a dramatic reduction foreign exchange earnings for oil exporters.
The US balance of goods and services is now falling. In January 2009, the deficit was $36 billion. Before the Lehman crisis, the US deficit averaged around $60 billion a month. That is quite a contraction.
The US consumer is unlikely to start spending any time soon. With household net wealth down 19.9 percent in just 18 months, Americans are now trying out a period of extended self-denial. They are cutting back on big TVs, cheap electronics and oil products. That is very bad news for China.
So much for decoupling.