The global economic news is not good lately. The Italian election was a statement against the austerity policy of the previous government, but failed to offer an alternative. The resulting uncertainty keeps Italy's government bond market on thin ice, threatening to engulf the whole euro zone in a new financial storm.

The U.S. government has been embroiled in a fight over something called "sequester" for weeks without a solution. The resulting US$ 85 billion cuts in government spending rekindle the risk of double-dip recession. The cuts are 0.5 percent of GDP and less than one-tenth of the United States' fiscal deficit. The big worries over them reflect the fragile state of the American economy after massive stimulus over five years and a dysfunctional U.S. political system.

India just presented a budget that disappointed a market hoping for major reforms. While the budget promises some reduction of the deficit on good growth outlook, it does not really show any teeth in reining in the country's long fiscal challenge due to extensive government subsidies and weak tax collection efforts. The big and persistent government deficit, close to one-tenth of GDP, causes inflation and crowds out investment. It does not appear that India is working to create its own growth dynamic in a weak global economy.

China is still struggling with controlling property speculation after attempting it for five years, even though the government has complete control over tax and lending policies. It is a symbol of political failure. When an obvious wound to the economy is left to festering for so long, it is difficult to imagine the country will be able to tackle other tougher issues, like reforming the government and state-owned enterprises, increasing transparency, and establishing the rule of law.

The leadership failures around the world reflect that the world has changed, but the kind people who lead remain the same, even though the faces may change from time to time. The existing generation of leaders thinks in terms of rising tides lifting all the boats and burying problems underneath. Their instinctive reaction to economic difficulties is to stimulate growth. Unfortunately, such thinking does not apply now. The growth potential of the global economy is substantially lower than before under the best circumstances and, if the problems are not solved, is lower. The current global growth rate, around 2 percent, is likely to remain the norm for years to come. Those who hope for rising tides to solve all the problems expose their economies to crisis again and soon.

The Bernanke Show

The U.S. government, both on the fiscal and monetary side, has adopted a stimulus approach since the 2008 crisis. It has the luxury to do so because the dollar is the global reserve currency. It gives the Fed room to expand money supply without worrying about a collapse in the dollar's value. The government can borrow way beyond what others can. Washington's policy has followed the path of least resistance.

The United States' stimulus has worked magic in reviving speculative activities. The stock market is close to an all-time high and the credit spread an all-time low. That is what the Fed wanted to achieve. It hoped that the lower risk premium would boost investment and, hence, revive growth. Unfortunately, the latter hasn't happened. The Fed's interpretation is that stimulus is not enough. Hence, it is pursuing QE3 and QE4. The Fed's balance sheet has quadrupled since the crisis to above US$ 3 trillion. It is likely to add another US$ 1 trillion this year. Again, it is working wonderfully in encouraging speculation, yet failing to boost investment and the GDP growth rate.

Even though most analysts interpret the spending cuts as a disaster, I view them as the first piece of positive news in Washington's policy-making over the past five years. With baby boomers retiring, the trend is for spending to rise further. Unless some cuts are made to reverse this, even the dollar's unique status cannot save the United States from a debt crisis within five years.