Locking Swords

I’d simply love to be a fly on the wall in London this weekend. The G7 finance ministers are about to meet the central bankers, and as in by now well known, these two groups haven’t exactly been hitting it off too well lately, at least, and better said, in Germany and Japan they haven’t.

In particular I would like to hear John Snow’s contributions. Snow notoriously is banking on growth in Europe and Japan to ease the US out of its trade imbalance. But being pro-growth in the present context would seem to imply a stance on interest rates. The central bankers are worried about global liquidity and the danger of US yield curve inversion ( and here, for a very interesting discussion of the topic – certainly the best I’ve seen – from the Morgan Stanley GEF team). So one group want to put rates on hold, while the other wants to raise them, Snow is in the middle, but will he come off the fence?

Brad Setser has a post which has some relation to this.

Brad seems to take the view that a big part of the explanation on global imbalances is the US fiscal deficit. I beg to differ. Indeed I think Brad is in danger of putting himself on the wrong side of an old (1930s) argument that probably he wouldn’t want to be on the wrong side of.

Let me explain: the important thing to watch is the global economy (not the local examples, US, Germany, Uk, China etc – Hat-tip to Andy Xie hear although I don’t have the direct link handy). Now what is important is the global equilibrium, in terms of the sustainable global growth rate. Now……. simply applying a restrictive fiscal policy and a tighter monetary one in the US would bring the budget into balance and the external trade deficit down, but what would happen to the level of employment (in the US and globally)? What would be the knock-on consequence for growth in China? Would this be a ‘better’ equilibrium than we have now, would it be more sustainable? Somehow I doubt it. And I think that is why we need to address this issue globally.

Which takes me back to being a fly on the wall in London……

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".