By Andy Xie, Caijing guest economist and board member of Rosetta Stone Advisors Limited
From Caijing Magazine

Policymakers around the world have not shown an understanding of the current crisis. It is the end of a two-decade long bubble. It is the end of the asset-based economy. It is the end of productivity dividends from IT revolution and globalization. Perhaps one tenth of the income in the global economy was from bubble activities and is permanently lost. The income will shift elsewhere. The resulting demand is different. The supply side has to change to meet a different mix of demand in the post bubble economy. If governments don’t understand, the world may suffer a lost decade ahead. No, it is not Japan in the 1990s. It is Japan of the 1990s plus inflation, i.e. stagflation.

Stock markets around the world have fallen close to or below the lows of November 2008. Concerns over bank bailout uncertainty and deepening recession drove the decline that reversed the 20 percent bounce from the lows of November 2008. The delays in releasing details by the U.S. Treasury on its bank bailout plan led to suspicions that it didn’t know what to do yet. The exposure of European banks to Eastern Europe caused concerns over their solvency. If big global banks remain mired in bad assets, credit system won’t function normally, and the global recession has no hope to end soon.

On the economic front, the news is grim: Japan’s GDP contracted by 3.3 percent, the euro zone by 1.5 percent, and the U.S. by 1 percent in the last quarter of 2008. The U.S. fared better because it piled up inventories, which could lead to a worse situation later. The global economy probably contracted by 2 percent in the last quarter of 2008 from the previous quarter, the worst decline since the World War II. The first quarter of 2009 won’t be better. January trade data for East Asian economies already casts a dark shadow over the quarter. All the data are portraying a global economy burgeoning on collapse.