Globalization needs reshape
President Obama, most of his fellow citizens and much of the rest of the world agree that the US broke the world economy and now has the duty to fix it. But the crisis is a product of the global economy. It cannot be cured by the US alone. Fortunately, Mr Obama has the authority needed to lead the world towards a resolution. It is in the interest of his country and the world that the world economy be put on a sounder footing. Should this effort fail, I fear a resurgence of protectionism will be the outcome.
The world has divided into two economic camps: in one are countries with elastic systems of consumer finance and high consumption; in the other are countries with high savings and investment. The US is the most important example of the former. China is the most significant example of the latter. Spain, the UK and Australia were mini versions of the US; Germany and Japan are mature versions of contemporary China.
The biggest point about the world economy today is that the credit-fuelled household borrowing that supported the excess demand in deficit countries has come to a sudden stop. Unless this is reversed, excess supply of surplus countries must also collapse. This statement follows as a matter of logic: at world level, supply must equal demand. The question is only how the adjustment occurs.
Someone have argued that the driving force behind these “imbalances” has been the policies of surplus countries and particularly of China, whose surpluses have grown particularly quickly. A managed exchange rate, huge accumulations of foreign currency reserves and sterilization of their monetary consequences have generated national savings rates of well over 50 per cent of gross domestic product and current account surpluses of more than 10 per cent. Consequently, the excesses of deficit countries were partly a response to the behavior of surplus countries.
On the other hand, the pattern of global deficits and surpluses was solely caused by western policymakers, particularly the Federal Reserve’s lax monetary policies and unregulated expansion of credit.
Whoever is more correct, one point is certain: huge asset price bubbles made possible the excess supply of some countries, particularly China. Since the Asian financial crisis of 1997-98, the developed world – and the US in particular – have experienced, successively, the largest stock market bubble and the biggest credit-fuelled housing bubble in their histories. And now, this era is over. We will struggle with its aftermath for years. So what happens next? The implosion of demand from the private sectors of financially enfeebled deficit countries can end in one of two ways, via offsetting increases in demand or via brutal contractions in supply.
If it is going to be through contractions in supply, the surplus countries are particularly at risk, since they depend on the willingness of deficit countries to keep markets open. That was the lesson learnt by the US in the 1930s. That’s why a lot of people concern the future of China and its export-oriented economy.
Obviously, expansion of demand is much the better solution. The question, though, is where and how? Managing this adjustment is far and away the biggest challenge for the world leaders and economies.At this stake, it is essential to clean up the huge current mess. But it is also evident that an open world economy will be unsustainable if it remains dependent on bubbles. Collapse of globalization is now no small risk. It’s time to not only reshape the US financial industry, but also the world economy system.
The world has divided into two economic camps: in one are countries with elastic systems of consumer finance and high consumption; in the other are countries with high savings and investment. The US is the most important example of the former. China is the most significant example of the latter. Spain, the UK and Australia were mini versions of the US; Germany and Japan are mature versions of contemporary China.
The biggest point about the world economy today is that the credit-fuelled household borrowing that supported the excess demand in deficit countries has come to a sudden stop. Unless this is reversed, excess supply of surplus countries must also collapse. This statement follows as a matter of logic: at world level, supply must equal demand. The question is only how the adjustment occurs.
Someone have argued that the driving force behind these “imbalances” has been the policies of surplus countries and particularly of China, whose surpluses have grown particularly quickly. A managed exchange rate, huge accumulations of foreign currency reserves and sterilization of their monetary consequences have generated national savings rates of well over 50 per cent of gross domestic product and current account surpluses of more than 10 per cent. Consequently, the excesses of deficit countries were partly a response to the behavior of surplus countries.
On the other hand, the pattern of global deficits and surpluses was solely caused by western policymakers, particularly the Federal Reserve’s lax monetary policies and unregulated expansion of credit.
Whoever is more correct, one point is certain: huge asset price bubbles made possible the excess supply of some countries, particularly China. Since the Asian financial crisis of 1997-98, the developed world – and the US in particular – have experienced, successively, the largest stock market bubble and the biggest credit-fuelled housing bubble in their histories. And now, this era is over. We will struggle with its aftermath for years. So what happens next? The implosion of demand from the private sectors of financially enfeebled deficit countries can end in one of two ways, via offsetting increases in demand or via brutal contractions in supply.
If it is going to be through contractions in supply, the surplus countries are particularly at risk, since they depend on the willingness of deficit countries to keep markets open. That was the lesson learnt by the US in the 1930s. That’s why a lot of people concern the future of China and its export-oriented economy.
Obviously, expansion of demand is much the better solution. The question, though, is where and how? Managing this adjustment is far and away the biggest challenge for the world leaders and economies.At this stake, it is essential to clean up the huge current mess. But it is also evident that an open world economy will be unsustainable if it remains dependent on bubbles. Collapse of globalization is now no small risk. It’s time to not only reshape the US financial industry, but also the world economy system.
Labels: crisis
posted by Jiu Zhuang at
1:58 PM
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