Martin Wolf is still pushing the savings glut theory in his column yesterday and, predictably, calls for countries with large surpluses (China and Germany first and foremost) to increase their spending to save the world economy, as the debtor nations can no longer increase their debt to sustain activity, as they used to until the crisis. and he promises (should this be worth a Godwin alert?) 1930s turmoil if this does not happen:

think what will happen if, after two or more years of monstrous fiscal deficits, the US is still mired in unemployment and slow growth. People will ask why the country is exporting so much of its demand to sustain jobs abroad. They will want their demand back. The last time this sort of thing happened - in the 1930s - the outcome was a devastating round of beggar-my-neighbour devaluations, plus protectionism. Can we be confident we can avoid such dangers? On the contrary, the danger is extreme. Once the integration of the world economy starts to reverse and unemployment soars, the demons of our past - above all, nationalism - will return. Achievements of decades may collapse almost overnight.

But I think he misses the point. The problem is not one of insufficient demand (which he proposes to boost via US budget deficits and, idieally, spending by China and Germany), the problem is one of insufficient incomes. If the US spends more debt-provided money, it will only generate distortions and imbalances to the economy, which will still need to be corrected later. If Germany or China spend more, it will only mean that they will be buying their own goods instead of Americans doing so: it will not improve global welfare, as it means Americans with less junk and Germans with more (presumably making both unhappy). No, what is needed is for spending to be increased in a sustainable way, and that can only happen if incoems increase. Wages (income for workers) need to be increased, and taxes (income for govenrment) ditto. Otherwise demand will shrink.