ANALYSIS - Global economy rebalancing the hard way

By Emily Kaiser

WASHINGTON (Reuters) - The credit crisis is accomplishing something that years of scolding failed to do: curbing U.S. consumption and paring the piles of excess cash amassed in China and oil exporting countries.

While economists have long argued that such a rebalancing was badly needed to safeguard global growth, it is happening so fast that it threatens to deepen the downturn.

In a perfect world, debt-laden U.S. households would gradually build up their savings as China redirected some of its wealth toward faster domestic growth, while the global economy kept growing at a sustainably healthy clip.

Instead Americans, who lost nearly $3 trillion in wealth in a single year, have curbed spending at the sharpest rate on record, China's exports are falling faster than its economy can adjust, and a global recession looks increasingly likely.

World finance leaders who are debating how best to put public money to work to limit the economic fallout must walk a fine line with ugly consequences on either side. Do too little to boost growth and the recession deepens. Do too much and the cycle of easy borrowing and spending that contributed to the credit crisis could start all over again.

"Clearly, we don't want our consumers to be over-levered and coming back to a more normal savings rate is an appropriate process," said Neel Kashkari, the U.S. Treasury official who oversees the government's $700 billion financial rescue fund.

"The challenge for policy-makers and for legislators is we don't want that correction to happen too quickly where it becomes destructive to the economy as a whole and we suffer grave economic consequences."

That is precisely why the U.S. Federal Reserve, Treasury and many of their counterparts around the world have committed trillions of dollars in public funds to counteract the worsening recession.