by Jerome a Paris
Wed Jun 18th, 2008 at 07:26:54 AM EST
Martin Wolf is still pushing the notion that a savings glut brought us to the current crisis:
Interventionist policies aimed at sustaining export competitiveness expand economies. The results normally include rapid rises in net exports, low interest rates, aimed at curbing the capital inflow, and expansion in the monetary base, despite attempts at sterilisation. The Chinese economy is overheating as a direct result of this trio of effects.
Most of these reserves were accumulated by countries more or less explicitly targeting the US dollar and accumulating US liabilities. The resulting capital flow financed the US trade and current account deficits. But a trade deficit is contractionary: for any given level of domestic demand, it lowers domestic output. Thus, the US needed to expand domestic demand, in order to offset the contractionary effect of the external deficits. Some groups within the economy needed to spend more than their incomes. The most important such group turned out to be households. Thus the growth in US household indebtedness that led to today’s “credit crunch” is a direct result of the global imbalances.
He goes on to say (correctly) that this creates a policy headache as the Fed is now trying to expand a post-bubble US economy right at the time when emerging economies, which are pegged (by their choice) to the dollar, are booming and need to slow down. He is also right to note that global inflation (fuelled in his view by the expansionist policies of the exporters) is a threat that requires coordination of policies.
The problem is that he gets the initial diagnosis wrong- the cause of the current imbalances - and of global inflation - was Western, and in particular US - policies focused on providing cheap debt. The reason Western consumers had to borrow was not to absorb the Asian surpluses, it was to compensate for their stagnant incomes caused by macro-economic policies that favor short term corporate and financial profits over everything else. All follows from there: the Asian surpluses were a response to that surplus demand from the West (supported, it is true, by the mercantilist policies of these countries); inflation was created then, but took the shape of asset price inflation rather than goods inflation (thanks to the artificial price competitiveness-protecting policies of the Asian exporters) - it is only now spreading to other goods as the emerging economies overheat and put pressure on global resource availability.
The financial bubble has now burst, creating pain for all, but the inflation it unleashed previously is still there, and lowering interest rates today is like opening the door after the horses have bolted...
Earlier Anglo Disease articles.
