Policymakers are still failing to grasp the gravity of the economic crisis, and the global financial system will emerge with a fundamentally different model, strategic and policy consultant William Macdonald said on Tuesday.

Speaking at a Toronto symposium on the future of the global economy, Macdonald said the crisis is largely a result of significant imbalances in the world economy. The tendency of U.S. consumers to spend more than they earn contradicts the habits of consumers in Germany, China and Japan, who earn more than they spend, he said, and this contradictory model cannot be sustained.

“The two-model global economy of the past 30 years is dying, and will soon be dead,” Macdonald said.

The massive scale of the problem requires action by countries around the world, not only the United States, he said. “This is so big that it demands mobilizing the efforts of all countries.”

But he added that the recovery of the U.S. economy is crucial in allowing the rest of the global economy to recover.

In particular, Macdonald said the U.S. economy needs to achieve a more sustainable balance between what it spends and what it earns, while surplus economies in the world must rely less on exports to drive their growth. The export-led model is dying, he said.

These changes will ultimately result in a new world order as the global economy emerges from the current downturn, said Macdonald.

But before policy makers can begin to resolve the crisis facing the global economy, it is crucial that they correctly diagnose the underlying problems, Macdonald warned.

“The thing that we need is the right diagnosis of the disease,” he said. “I’m still not sure that we’ve reached a full understanding of the nature and the implications of the U.S. balance sheet recession.”

He added that policymakers have failed to recognize the significant problems caused by the economic imbalances in the global system.

Once the core problems are identified, Macdonald said policymakers need to focus efforts on three main areas: fostering stronger demand in the real economy, improving credit flows and correcting the supply and demand imbalances.

Policy actions taken by both the U.S. and governments around the world so far have fallen short of what’s necessary, Macdonald said.

He added that the financial system has also played a major role in fuelling the crisis. He pointed to such problems as too much leverage, mispricing of risk, and too much opaqueness and complexity.

Macdonald calls for greater regulatory oversight and more discipline in the global financial system.

IE