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War and Peace by Shlomo Ben-Ami |
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Crossing Cultures by Ian Buruma |
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The Statesmen's Debate by Castaneda, Haass, Rocard |
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Anatomy of the Global Economy by J. Bradford DeLong |
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The Rebel Realist by Joschka Fischer |
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Capitalism Then and Now by Harold James |
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The Peacemaker by Richard Holbrooke |
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Global Warning by Bjorn Lomborg |
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European Observer by Dominique Moisi |
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Of Might and Right by Joseph S. Nye |
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History in Motion by Chris Patten |
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Roads to Prosperity by Dani Rodrik |
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The Unbound Economy by Kenneth Rogoff |
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Economics and Justice by Jeffrey D. Sachs |
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Finance in the 21st Century by Roubini, Shiller |
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The Ethics of Life by Peter Singer |
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Transatlantic Perspectives by Feldstein, Sinn |
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I Dissent: Unconventional Economic Wisdom by Joseph E. Stiglitz |
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Against the Current by Robert Skidelsky |
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Awakening India by Shashi Tharoor |
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The Next Wave by Naomi Wolf |
This month’s International Monetary Fund (IMF) meetings in Washington will bring together the world’s top finance ministers and central bankers at a critical juncture for the global economy.
For starters, the roof is starting to collapse on the global housing bubble, as housing markets begin to freeze up not only in the United States, but also in many other countries, such as high-flying Spain. Moreover, money markets, especially in Europe, remain traumatized by the festering global credit crunch. Record-high food and energy prices, combined with sharply rising wages in China, are pushing up inflation in much of the world. Last, but not least, the US productivity boom is decelerating.
These combined pressures will make it far more difficult for central banks to sustain the so-called “Goldilocks” economy (“just right” inflation and growth). At the same time, the outside world will be looking especially carefully at what, if anything, officials plan to do if the dollar continues to sink. Though exchange rates are notoriously unpredictable, the best guess is that a slow unwinding of the massive US trade deficit will keep the dollar on a path of gradual long-term decline.
But the fact that several Asian and emerging-market countries are resisting this decline by buying dollars is putting inordinate pressures on the more flexible currencies, such as the euro and the Canadian dollar, which are trading at record levels. (What are the Chinese planning to do with all their ever-growing $1.4 trillion in reserves? Do they intend to give foreign athletes paper bags stuffed with dollars as a welcoming present at the Olympic village?)
European leaders are arguing, with some justification, that their exporters are paying the price for America’s huge trade imbalance with Asian and oil-exporting countries. If the US goes into recession, the acrimony will get a lot worse.
The IMF’s leadership tried to broker a deal over currencies at its April meeting, but without tangible results. Given that China’s ruling Communists are holding their Party Congress at the same time as the current IMF meetings, a deal seems unlikely now, too. Yet, given clear inflationary pressures in countries like Saudi Arabia, Argentina, and Russia, and notable price spikes in China, the world just might have reached a moment when agreement can be reached.
Let’s hope so. There could be a real disaster if US growth woes turn today’s mild downward pressures into something much more serious. The Federal Reserve would be forced to lower interest rates further, making the dollar even less attractive, and the concomitant shift in global demand away from the US, marked by a sharp decline in the US trade balance, would put still more pressure on the dollar. According to my own calculations in a series of research papers with Maurice Obstfeld, the trade-weighted dollar would likely fall by 20% if a global demand shift (say, due to a US housing recession) were to cut the US trade deficit in half.
In principle, such a depreciation against all of the world’s currencies is manageable. But if emerging markets force Europe to take all the adjustment, the results would be catastrophic, pushing up the euro to $1.50, $1.60 or beyond, with truly dire consequences for trade.
Indeed, the US Congress has already produced a series of ominous bills aimed at retaliating against China and other countries that engage in one-way currency intervention. The leading Democratic US presidential candidates have indicated their support. Fortunately, the IMF recently asserted the right to take action if countries engage in sustained one-way currency intervention. But will incoming IMF Managing Director Dominique Strauss-Kahn be able to exercise this new power quickly enough to avert a crisis?
The IMF itself, of course, is in a deep crisis, with many questioning its mission and legitimacy. For better or for worse, however, current circumstances offer an opportunity. It would be unfortunate if the finance ministers merely sit around and beg Fed Chairman Ben Bernanke and European Central Bank head Jean-Claude Trichet to rescue them with rate cuts. It would be even worse if European ministers, frustrated with gridlock over exchange rates, started sharing ideas for creatively managing their budgets to stimulate short-term demand, rather than long-term growth.
For the past couple of years, finance ministers and central bank heads have had the luxury of using the IMF meetings to congratulate themselves on rapid global growth, regardless of how much they actually contributed to it. (Globalization and China were the biggest part of the story.) This time needs to be different.
Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.
Copyright: Project Syndicate, 2007.
www.project-syndicate.org
