Ian Bremmer and Nouriel "The Glass is Half Empty" Roubini write:
We enter the new year grappling with the most serious global economic and financial crisis since the Great Depression. The U.S. economy is, at best, halfway through a recession that began in December 2007 and will prove the longest and most severe of the postwar period. Credit losses of close to $3 trillion are leaving the U.S. banking and financial system insolvent. And the credit crunch will persist as households, financial firms and corporations with high debt ratios and solvency problems undergo a sharp deleveraging process. Worse, all of the world's advanced economies are in recession. Many emerging markets, including China, face the threat of a hard landing. Some fear that these conditions will produce a dangerous spike in inflation, but the greater risk is for a kind of global "stag-deflation": a toxic combination of economic stagnation, recession and falling prices. We're likely to see vulnerable European markets (Hungary, Romania and Bulgaria), key Latin American markets (Argentina, Venezuela, Ecuador and Mexico), Asian countries (Pakistan, Indonesia and South Korea), and countries like Russia, Ukraine and the Baltic states facing severe financial pressure.
And it only gets worse:
Politics will make matters worse, primarily because governments in both the rich and the developing worlds are intervening in their economies more broadly and deeply than at any time since the end of World War II. Policy makers around the world are hard at work crafting stimulus packages filled with subsidies and protections they hope will breathe new life into their domestic economies, and preparing to rewrite the rules and regulations that govern global markets. Why is this dangerous? At the G-20 summit a few weeks ago, world leaders pledged to address the crisis by coordinating their economic policy responses. That's not going to happen, because politicians design stimulus packages with political motives -- to satisfy the needs of their constituents -- not to address imbalances in the global economy. This is as true in Washington as in Beijing. That's why politics will drive the global economy more directly (and less efficiently) in 2009 than at any point in decades. Its politics that is creating the biggest risk for markets this year.
Read the House stimulus bill, and you aren't likely to feel any better about the shape of things to come. The bill's "tax cuts" are stimulus checks that the Feds will send to you in the mail - just as they did last year, to no substantial macroeconomic effect. A huge chunk of the remaining money is aid to states to help them balance their books. That isn't exactly "stimulus." What's left will go to infrastructure -- good! -- but also to pork projects, government make-work that doesn't increase demand, and subsidies for alternative energies that only further distort price mechanisms and hence the economy. The "tax cuts" aren't stimulative, in other words, and the spending probably isn't great enough to boost demand. Congress needs to go back to the drawing board. Be afraid.