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America has always been a land of extremes, a place where, at various times, consumption and frugality have each wielded sacral sway.

It shouldn't come as a surprise, then, that just as the country begins to extricate itself from what might be described as the paradox of gluttony, it is now in danger of succumbing to the paradox of thrift – and dragging much of the global economy along with it.

The former dilemma – which kicked into high gear not long after the Sept. 11, 2001, terrorist attacks, when the Bush administration made consumer spending a handmaiden to patriotism – held that people actually got richer when they collectively saved less: The increase in purchasing demand lifted stock markets and housing prices, inflating the value of personal assets.

This proved a fine theory, so long as these assets continued to appreciate and fuel more purchases; when they didn't, it proved instead a fine recipe for a massive credit bubble, and, by extension, the Great Recession. The problem now, as the pendulum swings wildly in the other direction, is that Americans are beginning to save again.

Saving is something Americans haven't done at all in the past few years, and have done only marginally in the past decade.

In May, Americans stashed away 6.9 per cent of their after-tax income, the highest level since 1993, and many economists figure that number will inch up to 8 per cent or more in the coming quarters. That compares with zilch last year, and a negative savings rate in 2007, when Americans bought more than they earned.

In the long term, this relative miserliness isn't such a bad thing. Spending will once again be a function of incomes, rather than assets, and the U.S. economy will be less vulnerable to the kind of credit-fuelled crisis that we're all trying to climb out of.

In the immediate term, however, there is little doubt this saving will slow the pace of a global economic recovery. The paradox of thrift, first espoused by John Maynard Keynes, posits that if people save too much in bad times, they could actually become poorer: The lack of consumption begets a falloff in demand, which in turn stalls the economy and results in lost jobs.

This is a question of degree, of course: The savings rate now is merely a return to historical levels, and not some unprecedented cinching of the purse strings.

Even so, this incremental increase has profound implications when you consider the American consumer accounts for 70 per cent of the country's GDP.

“This marks a significant change in the global economy,” said Ken Lieberthal, who was the senior director for Asia on the national security council under President Bill Clinton, and is now a professor of business administration at the University of Michigan.

“It means the U.S. will no longer provide the level of consumption the rest of the world has become accustomed to, and built their economic models around. I see the potential for very substantial friction going forward.”

There are a couple of ways to fill the gap.

Americans could export more, but they'd have to export a lot more to offset the drop in consumption – perhaps as much as 3 per cent of GDP, according to Mr. Lieberthal's estimate.

This seems fanciful, when you consider that every other nation on the globe is attempting to kick-start economic growth by selling more of their own goods.

Slower growth

Indeed, in a speech two weeks ago, U.S. Federal Reserve governor Kevin Warsh sought to dampen expectations that the economy had turned the corner, and warned that much of the world could be mired in slower growth for several years.

The evidence is pretty convincing.

True, the sprawling U.S. current account deficit – the amount by which the country's imports exceed its exports – fell to $101.5-billion (U.S.) in the first quarter. But this was hardly a reflection of growing export might; in fact, exports dropped, falling to $249.4-billion from $290.6-billion in the same period a year ago.

Retail sales did nudge higher, providing markets with a quick dose of optimism, but this was mostly because of the rising cost of oil. Strip that out, and sales were up a measly 0.2 per cent.

And on the asset side of the equation, things look even more bleak.

Household net worth is now just over $50-trillion – rich compared with most countries, but still $14-trillion below where it was two years ago, a result of a relentless slide in housing prices.

Washington's $789-billion stimulus package has helped to stabilize the economy, raising incomes by 1.4 per cent last month and boosting spending a modest 0.3 per cent. Yet the U.S. government has merely supplanted the U.S. consumer as the world's buyer of last resort, and that can only be temporary.

As Treasury Secretary Timothy Geithner said in a speech during a recent trip to China, economic recovery will depend upon a fundamental rebalancing of global trade and spending habits. “In the United States, savings rates will have to increase, and the purchases of U.S. consumers cannot be as dominant a driver of growth as they have in the past,” he warned.

“Globally, recovery will have come more from a shift by high-saving economies to stronger domestic demand, and less from the American consumer.”

This is one of the more popular refrains among those looking for a saviour: That the Chinese will step into the breach and begin spending more.

Maybe that will happen eventually, but don't bet on it any time soon.

It's tough to persuade Chinese consumers, who have made thrift a virtue, to spend considerably more money when they lack the social safety net of their counterparts in the West.

Between 2001 and 2008, annual Chinese exports to the United States tripled to $338-billion – five times the amount of U.S. exports to China, according to Peter Morici, an economics professor at the University of Maryland.

Filling the void

China is slowly taking steps that should help narrow this huge trade imbalance, and it should be noted that consumption rose there in the first quarter thanks to some aggressive stimulus.

But building infrastructure, putting health care in place and changing cultural attitudes is no short-term project, and it could be years before increased consumer spending meaningfully rises as a percentage of the country's GDP.

“It is almost mathematically impossible for China and India – either alone or together – to fill the void that is now being left by the post-bubble American consumer,” said Stephen Roach, chairman of Morgan Stanley Asia.

He notes that although the United States accounts for about 4.5 per cent of the world's population, it consumes $10-trillion annually. In contrast, China and India are home to 40 per cent of the global population, but account for just $2-trillion in spending.

Mr. Roach estimates that U.S. real consumption expenditures were likely down a record 1.5 per cent over the 12 months preceding the end of the second quarter – bad news not just at home, but abroad, particularly in China.

A fine line

This has placed Washington lawmakers in something of a quandary. They don't want Americans to return to their profligate ways, yet at the same time the legislators fear a sudden pullback in consumption could stall a nascent recovery.

“President [Barack] Obama wants short-term personal consumption and long-term personal savings,” Mr. Lieberthal said. “Fundamentally, there are contradictions everywhere. There are no simple answers.”

And no quick solutions. With the American consumption machine winding down, it will take considerable time, and political suasion, to achieve a new economic equilibrium.

There has been much talk about a recovery in the latter part of the year, but the likely shape of that recovery isn't terribly inspiring. The Bank of Canada has forecast growth of just 2.5 per cent in 2010, and estimates that will be roughly double the rate in the United States.

These are anemic numbers – until you compare them with the pessimistic forecast of the Organization for Economic Co-operation and Development, in which case they look positively exuberant.

The OECD is predicting growth of just 0.7 per cent for Canada next year.

The recovery, in other words, will be slow and grinding. And while it's encouraging to know the pain won't get any worse, that doesn't mean it won't continue to hurt.