The Wars of Austerity

As John Maynard Keynes would have understood well, today’s turmoil over currencies and trade is a direct result of our failure to solve the employment problem. That failure is reflected in the premature withdrawal of fiscal stimulus by all of the world's major economies.

LONDON – I have become increasingly less hopeful about prospects for a rapid recovery from the global recession. Coordinated fiscal expansion ($5 trillion) by the world’s leading governments arrested the downward slide, but failed to produce a healthy rebound. The current frustration is summed up by The Economist’s recent cover headline: “Grow, dammit, grow.”

There are two reasons to be pessimistic. The first reason is the premature withdrawal of the “stimulus” measures agreed upon by the G-20 in London in April 2009. All the main countries are now committed to slashing their budget deficits.

The second reason is that nothing has been done to address the problem of current-account imbalances. Indeed, the talk nowadays of currency wars leading to trade wars is reminiscent of the disastrous experience of the 1930’s.

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