Steve, a friend of mine, put together the following synopsis of Andy Xie's views on the global economy that I would agree with and have alluded to throughout this thread. Andy is an independent economist from Shanghai who apparently called all four financial crises including the Japanese asset bubble of the 1980s, the 1997 Asian financial crisis, the deflation of the dot-com bubble and the U.S. subprime mortgage crisis. According to Wikipedia, the economist published a blog entitled âApocalypse Soonâ heralding the unravelling of the US financial system some one month prior to the collapse of Lehman Brothers in September 2008. Xie has been an economist previously with the IMF and Morgan Stanley.
Anyway this article cites comments from Xie who beyond predicting there will be a global inflationary crisis of sorts, believes that central bankers âare leading the global economy to another disasterâ. I want to cite, in part, directly from Xieâs commentary not only on references to what he sees about a forthcoming crisis, but his views on the inadequacies of national and transnational institutions to deal with the worsening global financial conditions and the need for a ânew institutionâ for âeffective global coordinationâ.
Slow-cooking Inflation
Inflation remains on the rise despite a weak global economy.
Fed minutes show that its governors didnât have a clue about the coming catastrophe in 2008. Similarly, ECB experts didnât anticipate the sovereign debt crisis. There is no reason to believe that they will see the inflation disaster ahead, especially as the same people are still running the major central banks around the world.
The global economy faces legacy problems (e.g. debt and deficit), secular problems (e.g. aging), and structural problems (e.g. rapid redistribution of production capacity and changing relative prices). Monetary policy can help to stabilize the situation but not revive growth. Central bankers are trying to do the impossible and, inevitably, create monetary excess. This mistake is the reason for the inflation crisis to come.
When monetary policy tries to stimulate the rest of the economy to offset the reallocated activities, globalization diverts its impact through global sourcing to meet the demand. Pushing-on-a-string is the norm, not an exception, for monetary policy in todayâs world. When central bankers push harder on the string to achieve policy target, it leads to disasters like bubbles and inflation.
Central bankers were superheroes in the 1990s. They seemed to have a Midas touch in smoothing business cycles. Their sterling record of yesterday is questionable. The Midas touch turns out to have been bubble-making. It seems that they havenât learned this lesson and insist on being superheroes again. I believe that they are leading the global economy to another disaster.
And on global policy coordination, he writes:
No economy is bigger than global trade in todayâs world. This has fundamentally weakened the effectiveness of economic policy by any one country. Global coordination is critical to reviving the global economy.
The global economic institutions are the WTO, IMF and the World Bank. The WTO deals with trade disputes, the IMF handles balance of payment crises and the World Bank focuses on poverty alleviation in emerging economies. None is equipped to cope with todayâs global crisis.
The eurozone debt crisis has exposed the ineffectiveness of the IMF. Globalization has effectively turned many developed economies into developing ones. The IMF couldnât handle their sizes. It would be a stretch for the IMF to broaden its mandate to deal with global structural issues. Europeâs control over the IMF prevents other countries from embracing it to handle global issues.
Globalization has happened so fast that no sovereign country can deal with its consequences alone. Most experts think that the eurozone crisis shows that one currency needs one government. The challenge is even bigger than that. Currency flexibility is a limited tool. Emerging economies that have half of their economy tradable canât freely rely on currency flexibility. The whole global economy behaves somewhat like a one-currency economy.
A new institution that both developed and emerging economies can trust should be created. One possibility is to institutionalize the G20. As these economies are two-thirds of the global economy, their coordination could be effective.
Without effective global coordination, the world is in for volatile and difficult years ahead.
http://english.caixin.com/2012-03-20/100370448.html
