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The Wars of Austerity

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.

The problem of current-account imbalances is closely linked to the existence of a world savings glut. One part of the world, led by China, earns more than it spends, whereas another part, notably the United States, spends more than it earns. Provided the surplus countries invest in the deficit countries, these imbalances pose no macroeconomic problem.