Once agreement is reached that governments need to spend to help get their economies going again, the next question is what form that spending will take.

A number of options are being discussed. Increasingly, consensus is forming on using this opportunity to upgrade our infrastructure, just as happened in the 1930s. These investments are badly needed - providing this money is targeted correctly on upgraded transit, roads, bridges and airports that will ease congestion and improve productivity, we will see the payoff from this for decades to come.

Lots of headlines are proclaiming the dramatic drop in spending and “the new frugality” – and the potentially devastating effect on retailers in the period ahead.

The retailing industry is facing a shakeout over the next six to twelve months. But beneath the bleak news for retailers and for the manufacturers of the goods they sell is a more positive story. Over the past twenty years, many Western countries have seen a huge increase in indebtedness along with a dramatic drop in saving rates. Part of this stemmed from today’s “I want it all and I want it now” mindset – and part from the view that appreciation in houses and in stocks would offset the failure to save.

Even though we’re in the early days of the economic downturn, the shift in mindset to more balance between spending and saving appears to be more than a blip. While a painful adjustment for some in the short term, over time this will be a significant positive, as personal finances moved to a more stable and sustainable footing, capacity increases to absorb unanticipated setbacks related to health issues or employment and there is less reliance on public funding of retirement.

For more on this, see the New York Times column, Dying of Consumption, by Stephen Roach, Chairman of Morgan Stanley Asia.

A deeper, potentially positive, meaning to the decline in consumer spending is that Americans are now moving back to more prudent income-based lifestyles.

The economist Joseph Schumpeter is best known for the concept of “creative destruction,” the dynamic process whereby new ideas supersede old ones and innovation leads to the collapse of traditional market leaders. While it’s intensely painful if you have the misfortune to work for or invest in one of these companies, a key reason that the U.S. dramatically outperformed every other major economy in the 20th century was its flexibility, adaptiveness and willingness to allow losers to die.

Whether in the automobile industry, retailing or banking, consumers will be better off and the economic system will be stronger when marginal players are consolidated into stronger survivors – setting the stage for new upstarts to emerge and challenge the remaining incumbents.  In the U.S., France, Germany and the United Kingdom, an important byproduct of recent events is that weaker banks have disappeared from the scene, with the surviving banks becoming stronger as a result.

We’ve all heard the expression “you can’t put the genie back in the bottle.” In the past ten years, we have seen a remarkable outpouring of entrepreneurial spirit and energy in countries with historically closed economies, ranging from China, India and Vietnam to Eastern Europe and South America.

While the current economic downturn represents a setback, a fierce work ethic and drive to succeed has been unleashed – and while some Western companies and industries will struggle to adapt to the heightened competition that has resulted, the global economy will be the big winner as a result. 

As a side note, not long ago South America and Eastern Europe were seen as economic and political basket cases. Now, despite the issues every nation faces in the global economic slowdown, countries like Argentina, Brazil, the Czech Republic, Poland and Hungary are poised for strong growth over the mid-term, in large measure due to the opening of economies and a renewed commitment to democratic government.