Wednesday, April 1, 2009

Addressing Global Imbalances

As today's Martin Wolf column on the London Summit stress, there are roughly two approaches to solve the current global crisis. The first focuses in healing financial markets and pulling aggregate demand in advanced countries such as the US, the UK and Spain. The second focuses on re-balance the humongous savings surplus of fast-growing economies created over the last 18 years -Germany, China, India, Brazil, Japan are in this set of economies- is only resembled by the excess of consumption of some advanced economies -US, UK, Spain.

Wolf describes on depth the latter two approaches. A comprehensive solution should include at least three features: One, healing advanced economies financial systems. Two, de-leveraging financial balances of advanced economies -this opposes the spirit of taking US out of recession by increasing public spending and deficit. Three, a restructure of the global monetary system.

Of course there are several ways to deal with either of these three features. Addressing the first, healing the financial system, the recent plan labeled as the PPIP, unveiled by Secretary Geithner will re-start a market for toxic assets with no demand, however, it is difficult to anticipate whether or not this plan will re-start lending to the private sector.

About the second feature, de-leveraging advanced economies, aggregate demand in these countries should be increased, but not in an endogenously fashion but in the external sector one. There is one straight way to re-balance global economy, current debtors should increase exports to finish the umbalance. This exports should be targetted to creditor countries. The latter will address the excess of debt of the creditors, at the same time it should decrease the unemployment rate.

The third feature, is probably more complicated, what we do know is that in times where the IMF was trying to define its role in the present, it should absorb the explicit target of being the financial world's police, and probably help in the second feature, encouraging an increase in savings -increase in net exports- for the troubled economies and a decrease in the positive trade balance of theose with surpluses.

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