By Martin Wolf
Published: November 16 2010 22:25
They came; they saw; they lost. That is the reaction to what emerged on global rebalancing at the summit meeting of the Group of 20 leading countries in Seoul last week. Publicly, surplus countries persist in calling on those in deficit to deflate themselves into economic health. The consequences of this folly are now evident in the eurozone. At the world level, the US will never accept it. But, beneath the radar, something more productive may be emerging.
This more optimistic perspective can be drawn from the text of the leaders’ declaration. This states that “persistently large imbalances, assessed against indicative guidelines to be agreed by our finance ministers and central bank governors, warrant an assessment of their nature and the root causes of impediments to adjustment ... These indicative guidelines composed of a range of indicators would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions.” Ugly, but sensible. Together with the talk of the need for surplus countries to rely more on domestic demand, of enhanced surveillance by the International Monetary Fund and of exchange rates, a somewhat stronger mandate may have emerged.
In public, of course, debate has focused on the sins of quantitative easing by the Federal Reserve, with China and Germany voluble in condemnation. Why such modest monetary easing, in the context of a weak US economy and stagnant monetary growth, has caused such hysteria is hard to understand.
The core of China’s condemnation is that the US is exporting its troubles, by deliberately driving down its currency. It is easy to see three objections to this attack: first, it is untrue; second, exchange rate adjustment is necessary; and, third, this is a good description of Chinese exchange rate policy, instead.
The Federal Reserve is not purchasing foreign currency, but domestic bonds. It is doing so in order to sustain the domestic economy through deleveraging. True, such a policy is likely, other things being equal, also to lower the external value of the currency. But this is desirable. The US is a classic example of internal and external imbalances – high unemployment and a structural current account deficit. Textbook economics suggests that a depreciation of the real exchange rate is the right response. A depreciation of the nominal exchange rate is the least painful way to achieve this outcome.
Yet, unlike the US, China is indeed “printing money”, in order to buy foreign currency and protect external competitiveness. By September 2010, China had accumulated $2,648bn in foreign currency reserves (close to half of gross domestic product). In his remarks in Seoul, Hu Jintao, China’s president, called on the leaders to be committed to “the effort of opposing all forms of protectionism and removing existing trade protectionist measures”. Yet his own country’s currency policy surely comes under the category of “all forms of protectionism”. As the proverb goes, people who live in glasshouses should not throw stones.
The big economic point, however, is that the world needs to manage a post-crisis adjustment, in which capital flows turn around. In essence, this is a real, not a monetary, process. The rich countries cannot productively absorb the flow of capital that used to come from poor ones. Indeed, they never could. What could not go on now has to change.
To understand why this is urgent, it helps to look at financial balances within deficit economies. In the case of the US, for example, they tell a compelling story. The financial balances (gap between income and spending) of the household, corporate, government and foreign sectors sum to zero. What is revealing is how they do so.
Foreigners have consistently spent less than their incomes and so ran a current account surplus with the US. Up to the crisis, the counterpart deficits were run, roughly equally, by the government and the household sectors. After the crisis, the household and corporate sectors cut spending dramatically, relative to income. With foreigners, households and the corporate sector running surpluses, the government ended up in huge deficit (see chart). In my view, the underlying driver was post-crisis cutbacks by the private sector. The fiscal deficit was far more a result of these shifts than a cause.
The crucial point is that the US can reduce its huge fiscal deficits, without pushing the country into a deep slump, if and only if other sectors expand spending, relative to incomes. This is unlikely to happen in the US private sector, to a sufficient extent, though some expansion of investment is plausible. A good part of the needed adjustment must come from expansion of foreign spending relative to income – in other words, a reduction in the structural current account deficit.
This analysis lies behind any discussion of global adjustment. As the IMF’s report on the “mutual assessment process” in the G20 shows, the current account deficits of deficit countries are forecast to rise to levels seen before the crisis. Meanwhile surpluses are expected to stabilise (see chart). The inconsistency is clear. More important, this indicates how far the world is failing to put its prospective growth on a sustainable basis.
Changing this picture is not just in the interest of deficit countries. If the latter are unable to put their economies on a sustainable footing, there is a good chance that they will adopt more brutal methods to halt the drain in demand. This means protection, which would harm everybody, in the long run. It is far better to engage in a serious discussion of the path to adjustment than end up with such a battle for markets in a world of excess supply.
None of this will be easy. In monetary policy, for example, the possibility of a temporary stalemate between the US and China exists: the former can create dollars without limit, while the latter can respond by creating renminbi without limit, with which to buy the dollars. The “victor” in this struggle might be the one afflicted second by inflation. But such a “currency war” would surely be a tragedy, not least because it would have massively adverse effects on innocent bystanders with relatively flexible exchange rates. There has to be a better way than this. Indeed, there evidently is: a balanced medium-term adjustment programme. Seoul may not have brought this that much closer. But the road ahead has been laid out. Leaders should see their own interest in moving briskly along it.
Copyright The Financial Times Limited 2010
0 comments:
Publicar un comentario