Chindia

The G-7 (USA, Japan, Germany, UK, France, Italy, Canada) was taken off life support at the IMF – World Bank Annual Meetings. So was the G-8 (the G-7 plus Russia), although even fewer observers noticed or cared.  Since international organisations are never formally killed off, the G-7 and G-8 will simply be allowed to fade away. They reflected the economic and geopolitical distribution of power in the immediate aftermath of World War II.  When reality changes, even international organisations eventually catch on and up.  Germany, the UK, France and Italy are global bit players at best now.  They only matter if they act jointly.  The way to do this is through the EU – but with a twist.

For global economic and financial governance, the G-20 is supposed to take over from the G-7/8.  It consists of the ministers of finance and central bank governors of the G-8 plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi-Arabia, South Africa, South Korea and Turkey. The tally is completed by the European Union, represented by the rotating Council presidency and the European Central Bank President. The Managing Director of the International Monetary Fund  and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee (IMFC) and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an ex-officio basis.

In addition, a few countries have managed to elbow their way into the G-20 meetings for specific issues where they view themselves as playing a globally significant role.  As far as I can tell they achieved this by throwing their toys out of the pram and/or threatening to hold their breath and making a scene. The Netherlands fall into this category.  They base their claim to be invited (which was effective on three occasions thus far) on the country’s generosity as development aid donors, obviously not heeding the Talmudic view that giving charity and boasting about it, is actually a sin.

I spent the past weekend in Istanbul at the seminar jamboree that precedes the IMF-World Bank Annual Meetings.  Ministers of finance, central bankers, government officials and international civil servants all agreed on one thing: there would be no premature exit from quantitative easing, credit easing and other unconventional expansionary monetary policy measures such as the ECB’s enhanced credit support.

All those in a position of authority subscribed to the view that there was a major asymmetry between the risk of exiting too late and exiting too early: exiting too late would only cause minor overheating problems that could easily be corrected.  Exiting too soon would cause irreversible damage, because after a too early exit, policy could not be re-activated again.

Nobody explained the analytics or empirics to support that view.  It simply became an accepted truth.  In the world of mathematics and formal logic, there are two modes of proof: deduction and induction.  In economics, as in the other social sciences, we have three modes of proof: proof by induction, proof by deduction and proof by repeated assertion.

Be that as it may, the world is being flooded with official liquidity by the leading central banks of the overdeveloped world.  Because of the depressed state of the real economy in most advanced industrial countries (large negative output gaps whose magnitude continues to grow, high and rising unemployment rates), this official liquidity flood is unlikely to generate an overall (private plus public) liquidity flood in the overdeveloped world.  Commercial banks either hoard the newly injected central bank liquidity at the central bank in the form of deposits or use it to purchase safe liquid assets, such as the sovereign debt instruments of reasonably solvent nation states.  This has the further advantage of keeping the regulators happy, even if it does not do much for would-be private borrowers from the zombified banking system.

Broad monetary aggregates are growing little if at all in the overdeveloped world and credit growth to the non-financial enterprise sector and to the household sector remains minuscule.  We are therefore unlikely to see a credit boom or asset market frenzy any time soon in the advanced industrial countries, let alone any pick-up in domestically generated inflation for indices like the CPI. The massive injection of official liquidity by the Fed, the ECB, the Bank of England, the Bank of Japan and other central banks in the north-Atlantic region is much more likely to show up as credit and asset market booms, bubbles and – eventually – busts in those emerging markets that are growing rapidly again, that is, most emerging markets other than those in Central and Eastern Europe.  China, Brazil, India, Indonesia, Singapore, Turkey and Peru are but some of the countries at risk.

Sometimes economics can be helpful even if it does not allow you to make point predictions with any degree of confidence. This is the case, for instance, when it can rule out certain combinations of outcomes for different economic variables as unlikely or even nigh-on impossible. An example of such an unlikely configuration of outcomes is (a) a strong and sustainable recovery of the US economy and (b) a strong (let alone a strengthening) US dollar. A very similar statement can be made about the prospects for a speedy recovery of the UK economy

Until yesterday’s defeat of Roger Federer in the final of the US Open at Flushing Meadows, the most disappointing development this year was the performance of president Barack Obama and his administration – and my expectations were modest to begin with.

In the current worldwide debate about greenhouse gas emissions, the political leaders of the new big polluters (NBPs, especially China and India) attempt to shift the burden of reducing the global flow of new carbon-dioxide-equivalent (CO2E) emissions to the old big polluters (OBPs, mainly Europe, North America and Japan) by claiming the moral high ground, based on two arguments: (1) we are poor, you are rich, and (2) it’s our turn now to pollute.

I will, in what follows, take as given the proposition that (1) global warming is a reality; (2) global warming is a bad thing and (3) that human-made CO2E emissions are a significant contributor to global warming.  The science underlying these propositions is inevitably shaky – as has to be the case for any non-experimental science.  Still I believe that, even if I don’t really know whether my grandchildren are more likely to swim down Oxford Street or to ice-skate down Oxford street, the cost of not doing something about man-made CO2E emissions if they are indeed as harmful as the Greenhouse Lobby argues is vastly greater than the cost of unnecessarily restricting CO2E emissions – an application of the precautionary principle, if you want.

Whenever the cumulative effect of the daily observation, looking out of my window or into the mirror, of human inequity and wretchedness brings me to the point that I am convinced the human race is an evolutionary dead end, something incredible happens to restore my faith that a hunger for freedom and an unquenchable thirst for justice and fairness are part of our genetic code. Crowds often become mobs and mobs are mostly ugly and destructive. The sight of large numbers of unarmed people, most of them young, facing heavily armed police, regular army, militia or other armed thugs is awe-inspiring.

Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate.  In a written answer to questions from US senators, Geithner said: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency”.   In the US, the words “currency manipulation” are fighting words.  If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.

The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988.  The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.

A monopoly is a bad thing.  It invites abuse of the power it controls.   Sometimes it is not the worst thing that could happen.  Anarchy or the ‘state of nature’, can be worse.   I don’t know whether Thomas Hobbes was right for all time and places in asserting that man is not by nature a social animal and that society could not exist except by the power of the state – the wielder of the monopoly of legitimate coercive power.

There may have been some bucolic, idyllic communities  that dispensed with the institution of the state, where the fundamental rights of people (life, health, liberty) and  property rights could be enforced effectively by individual action or through acts of spontaneous cooperation without external, third-party enforcement.  But once we get to communities exceeding a dozen or at most a gross of people, an institution endowed with the monopoly on the  legitimate use of force against its own citizens appears to have evolved, to have been created or to have been imposed everywhere.

Standard boil-in-the-bag open economy macroeconomics tells us that expansionary fiscal policy, under conditions of perfect international capital mobility and a floating exchange rate is an ‘enrich-thy-neighbour’ policy as regards aggregate demand spillovers.  If the country is a price taker in the international financial markets, and if the fiscal action does not affect the foreign exchange risk premium, the fiscal impulse will be crowded out completely as regards any net impact on domestic aggregate demand, by an appreciation of the nominal and real exchange rates.  The external trade deficit increases by the same amount as the fiscal impulse, so the domestic fiscal expansion ends up spilling over 100% into a boost to aggregate demand in the rest of the world.

The UK Chancellor of the Exchequer, Alistair Darling, is fighting the good fight on policy towards the EU’s agricultural sector. Effectively, he has called for the abolition of the Common Agricultural Policy, the EU’s Welfare State for Farmers – a costly, distortionary, inefficient and inequitable arrangement overdue for the scrap heap.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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