They demonstrate clearly that China is prepared to compensate for export weakness by stimulating domestic demand.

These actions are usually justified as policies for boosting domestic demand, but they end up fueling a surrogate, low grade currency war.

Or an undervalued exchange rate can help to export the lack of domestic demand.

Fueling growth through domestic demand will have to be carefully managed.

To enhance domestic demand, Asia, including China, must reallocate resources and structurally transform the economy.

Policymakers should recast agriculture in the new environment of globalization, supply chains, and growing domestic demand.

But what China really needs is a greater effort to promote domestic consumption and lower the savings rate.

US President Barack Obama s new administration announced a three year fiscal package intended to stimulate aggregate demand.

To maintain growth, over spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption.

China now stands ready to absorb some of that surplus saving to promote a shift toward internal demand.

Incredibly, Japan was told to run huge budget deficits (reducing government saving) to boost domestic demand.

Indeed, China s 12th Five Year Plan is aimed at reducing dependence on exports and boosting domestic demand.

They doubt that an alternative development strategy based on boosting domestic demand would succeed.

The common wisdom is that to faster European growth requires a boost from domestic demand.

The US has been lobbying China for some time for economic policy changes aimed at stimulating domestic demand and open markets.

A wide range of official measures could be employed to support domestic demand while protecting medium term fiscal sustainability.

Energy hungry America has long depended on the global market to meet domestic demand.

On the one hand, they can compensate for the global weakness by turbo charging their own internal demand through aggressive fiscal stimulus.

The key to ending the European crisis is a stimulus plan that addresses deficiencies on both the supply and demand sides.

China s potentially strong domestic demand base and ample room for policy maneuvers can help it to avoid a hard landing.

However, it will need to be much better targeted at increasing demand in order to avoid adding more to the national debt than the rise in domestic spending.

Given anemic growth in domestic demand, America s only chance to move closer to its potential growth rate would be to reduce its large trade deficit.

Moreover, the whole idea of Keynesian demand stimulus was developed, again in the 1930 s, in the context of self contained national economies.

Reducing dependence on external demand for example, by promoting private sector investment and encouraging household expenditure is crucial.

Notwithstanding this economic logic, America told Japan that it must grow through domestic demand, not exports. US advice was cut the savings rate.

But China will do so by providing stimulus to internal demand, thereby weaning itself from relying on dollar based assets.

But the European economic recovery plan that was recently reaffirmed by the European Council of Ministers is mainly focused on national measures to support domestic demand. In implementing this plan, governments must refrain from the temptation to turn national measures into narrow protectionist schemes.

Notwithstanding this economic logic, America told Japan that it must grow through domestic demand, not exports.

Still troubled financial systems and huge fiscal deficits are keeping the West s deficit countries (especially the US) from expanding domestic demand.

But 2006 turned out to be a good year for growth in Europe, as surprising strength in exports sparked unexpected increases in domestic demand.

America s domestic demand shortfall reflects rising savings, balance sheet damage in the household sector, unemployment, and fiscal distress.

Large countries cannot expect to recover economically at the expense of the rest of the world they need to find ways to boost their own domestic demand.

Temporary Keynesian demand measures may help to sustain short run internal growth, but they will not solve France s long run competitiveness problems.

Unfortunately, far too much discussion has centered on what governments can do to stimulate demand through budget deficits and monetary policy.

Demand reduction

Dropping Demand

The northern countries argue that permitting wage growth and boosting domestic demand would reduce their competitiveness and trade surplus. But that misses the entire point surplus countries must contribute no less than deficit countries to global and regional rebalancing, because the world economy cannot export to outer space.

The northern countries argue that permitting wage growth and boosting domestic demand would reduce their competitiveness and trade surplus.

The world would be better off if most governments pursued policies that boosted growth through domestic demand, rather than beggar thy neighbor export measures.

Internal controls

But and this is the conundrum the ECB has few options for stimulating demand among the eurozone s more solvent agents, and thus supporting a sustainable recovery.

However, it has also limited the expansion of domestic demand and import growth, exacerbating rather than redressing the global imbalances.

So far, China has looked to external markets so that exporters can achieve the economies of scale needed to improve quality and move up the value chain. But there is no reason in principle that Chinese planners cannot follow the same model in reorienting the economy to a more domestic demand led growth strategy.

But there is no reason in principle that Chinese planners cannot follow the same model in reorienting the economy to a more domestic demand led growth strategy.

This is for internal use.