Ideologically, right wing forces - the US Tea Party and forces in Europe sharing the views of the British Conservatives - advocate limiting the public debt build up by radically reducing government spending. This is linked to a theory that the state is ‘crowding out’ the private sector. The recession’s main cause is the fall in private investment and this theory argues that resources used to finance the budget deficit would be used to generate an economic expansion if released to the private sector – for example US financial analyst John Mauldin argues "increasing government debt crowds out the necessary savings for private investment."

But reducing budget deficits by cutting public spending can't create an economic way out in present conditions. Reducing budget deficits cuts demand. But resources released to the private sector are used to pay down debt, so private spending will not increase sufficiently to compensate for the fall in public spending. Total demand will fall, increasing recessionary pressure.

However, other than in the short term, increasing the deficit doesn't work either - and large budget deficits are financially unsustainable in the medium term.

Running large budget deficits is often inaccurately described as a 'Keynesian' policy - inaccurately as Keynes own central concern was factors affecting investment and not budget deficits. For example US economist Paul Davidson claims in The Keynes Solution: "Anything that increases spending on goods and services increases the profitability of business firms and the hiring of workers." But this is false - for example, an increase in spending on goods and services accompanied by cost increases may lead profits to fall.

However, even if profit did increase, companies may not reverse the cuts in investment that are the core of the recession. Keynes pointed out that to generate investment a price must be paid to overcome "liquidity preference" - the advantages of holding assets in cash and other liquid forms. In present circumstances of high uncertainty, the cost of overcoming liquidity preference may be prohibitive.

Still more fundamentally, given excessive indebtedness, companies use resources to repay debt and not to invest even if demand increases. Therefore stimulating demand by budget deficits may prevent worse collapses in production but doesn’t produce significant output increases.

Low interest rates are also insufficient to provide a way out. These are necessary to prevent interest payments becoming unsupportable. But they do not lead to investment when companies are intent on paying down debt and have no intention of borrowing for investment.

There is a way out. It was used by China in its 2008 stimulus package and Keynes himself advised it. The state must overcome the threat or reality of a fall in investment by organizing investment itself. As Keynes noted: "It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment."

In the US and Europe the obstacles to Keynes', or China's, solutions lie in economic structure. After its 1978 economic reforms China no longer administers its economy, but it has a sufficiently large state sector to deliver investment programs. But in the US and Europe Keynes "somewhat comprehensive socialization of investment" does not exist and therefore, unlike China, they cannot deliver an investment-led stimulus.

The economic perspectives flowing from the new financial crisis are therefore clear. The US and Europe at best face several years of very slow growth. China’s economy will continue to rapidly expand.

John Ross is Visiting Professor at Antai College of Economics and Management, Shanghai Jiao Tong University. From 2000 to 2008, he was then London Mayor Ken Livingstone's Policy Director of Economic and Business Policy. The views expressed here do not necessarily reflect those of the China Daily website.