What the world needs now?
It’s not love sweet love.
Bernanke in the speech he gave today, besides looking at the circumstances of Asian economies in the business cycle, the ostensible topic of his speech, returned to a theme he has visited in the past. This is the danger of persisting imbalances: surpluses and deficits alike.
While he was very vague about how this should be approached, he was again clear on what needs to be achieved. High savings countries need to consume more and reduce the gap between savings and investment at home. High spending countries need to save more. There is a little something for everyone.
At the same time there is little evidence that any country is taking up a stand to pursue these objectives. Yet the risks are growing
Perspective on imbalances
One issue is that under the gold standard there were rules to the game. Deficit countries were forced to adjust because under the gold standard they lost gold reserves if they let current account deficits persist. No one wanted to run out of gold. So deficit counties usually hiked interest rates and slowed their economies down, contracting imports in the process to rebalance their trade, maybe they even ran a recession. While that system was disciplined it was also confining and it had the side effect that it rewarded countries that had gold mines. The current loose FX system that has few rules and none enforced has been short on discipline – very short. Hence imbalances have arisen, persisted and become enlarged in way that they never could under the gold standard.
G-20 not up to the challenge
The G-20 tried to consider a
Connections and linkages
The imbalances are one of the reasons for the dollar to be losing ground. The exchange rate is a remedy for US BOP ills since a weaker dollar will choke off US exports and spur US imports. But the dollar’s drop brings other tensions to the surface. Moreover, it is unlikely that the dollar can fall enough to purge the
History suggests that the sorts of problems that arise in the wake of these huge imbalances persisting and being extended are not minor inconveniences. Yet there is no agreement even on pursuing the goals that Bernanke has spoken of repeatedly and that were put on the table at the recent G-20 meeting. Growing payment imbalances have ended badly whether it was due to OPEC countries’ rising wealth, rising Japanese trade surpluses or
Can’t have your Egg Foo Yung and eat it too
The point, the risk, the dysfunction
To be sure Bernanke’s point is a sharp one. No one can tell you when we must get off this path onto one like the one Bernanke urges. By not adjusting, and letting a normal business cycle recovery occur led by