Depressionomics
Published: 21:30 - 09/10/08
It is time to get real. The western financial system is now, perhaps, stabilised. Banks, and bankers, are in retreat, with civil servants taking their place. The Federal Reserve, for example, can now lend directly to companies. That leaves the most important policy objective: supporting economic growth. The International Monetary Fund forecasts that world growth will fall to 3 per cent in 2009, although it could slump to as low as one. The challenge is to stop this chance of global recession turning into a depression.
This is as true of developed countries as it is of the developing world. Some exporting countries will be fine: oil prices remain three times higher than they were five years ago. But not all emerging economies are so lucky. The World Bank reckons as many as 30 face severe balance of payments problems. Even China, with its huge treasure chest of foreign reserves, is not immune. Without high economic growth, Chinese unemployment explodes. Recession, always arbitrarily defined, is relative.
The ability of governments to boost growth will be crucial. This may go against the purest free market grain. But look at it this way. The IMF estimates that US and European banks need to shrink their balance sheets by $2,000bn a year over the next five years. That is a terrifying contraction in the supply of global credit. If governments do not pick up the slack, the world risks falling into what is called the "paradox of thrift" where everyone cuts back spending simultaneously. Companies retrench, unemployment rises, consumption falls further, and so on in a vicious spiral. This was the plight of Asean countries after their 1997 crisis. They only wriggled free thanks to growing exports â a solution that cannot work for the whole world.
The G7 meeting in Washington this weekend is an opportunity to announce synchronised state action that mirrors Wednesday's coordinated rate cuts. Ministers can choose between direct spending or tax cuts, depending on their political hue. But either way, fiscal rules, such as Europe's Maastricht criteria, are there to be broken. Now is the time to do so.
Published: 21:30 - 09/10/08
It is time to get real. The western financial system is now, perhaps, stabilised. Banks, and bankers, are in retreat, with civil servants taking their place. The Federal Reserve, for example, can now lend directly to companies. That leaves the most important policy objective: supporting economic growth. The International Monetary Fund forecasts that world growth will fall to 3 per cent in 2009, although it could slump to as low as one. The challenge is to stop this chance of global recession turning into a depression.
This is as true of developed countries as it is of the developing world. Some exporting countries will be fine: oil prices remain three times higher than they were five years ago. But not all emerging economies are so lucky. The World Bank reckons as many as 30 face severe balance of payments problems. Even China, with its huge treasure chest of foreign reserves, is not immune. Without high economic growth, Chinese unemployment explodes. Recession, always arbitrarily defined, is relative.
The ability of governments to boost growth will be crucial. This may go against the purest free market grain. But look at it this way. The IMF estimates that US and European banks need to shrink their balance sheets by $2,000bn a year over the next five years. That is a terrifying contraction in the supply of global credit. If governments do not pick up the slack, the world risks falling into what is called the "paradox of thrift" where everyone cuts back spending simultaneously. Companies retrench, unemployment rises, consumption falls further, and so on in a vicious spiral. This was the plight of Asean countries after their 1997 crisis. They only wriggled free thanks to growing exports â a solution that cannot work for the whole world.
The G7 meeting in Washington this weekend is an opportunity to announce synchronised state action that mirrors Wednesday's coordinated rate cuts. Ministers can choose between direct spending or tax cuts, depending on their political hue. But either way, fiscal rules, such as Europe's Maastricht criteria, are there to be broken. Now is the time to do so.