| 2008 was a year of economic turmoil that spread around the globe. Globalization and the interconnected nature of countries helped drive growth from 2002 to 2006. China and the US seemed to be the perfect partners. As China produced goods, the US consumed. China saved, and the US spent. The international imbalance in savings and financial innovation are two reasons we will focus on as the cause of the economic downturn, in the context of Hyman Minsky's model of economic instability.The United States' and China's governments have taken several unprecedented monetary and fiscal policy measures to stabilize their economies. This paper explores the build up to the "financial crisis of 2008" and the policy responses of China and the United States. Both countries faced suppressed GDP growth in 2008 compared to previous years. The US is facing an asset price collapse or supply-driven recession in the housing market, whereas China is facing a decline in exports or a demand-driven contraction. This paper argues that, before economic stability can return in the long run, current account balances need to be reduced, meaning the United States needs to put policy measures in place to reduce the Federal deficit, increase savings rates and exit extraordinary monetary policy easing at the right time. China needs to increase domestic consumption and allow its currency rate to depreciate against the US dollar. |
