“Winds of depression”

From the FT:

The managing director of the International Monetary Fund has warned that the global economy faces the prospect of “economic retraction, rising protectionism, isolation and . . . what happened in the 30s [Depression]”, as European tensions again flared over suggestions in Paris that the UK’s credit rating should be downgraded before France’s.

“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating,” Christine Lagarde said in a speech at the US state department in Washington. “It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.”

 We now know that the 1930´s Great Depression was a consequence of contractionary monetary policies all over the developed world, with France (isn´t she always in the “limelight”) and the US all out on a “gold accumulating spree”.

At present there´s much hesitation in recognizing the monetary character of the present “depression” (yes, sir, it´s more than a “Great Recession”).

Nowadays the “politically correct” says that “everyone has to be involved in the process”, otherwise it´s considered “discrimination”. Maybe that´s why Christine Lagarde says things only have a chance to be resolved if every country and then some (all categories of countries) actually taking action!

That´s just not doable. There always must be a leader to point the way. In the EU the natural leader, Germany, is making a “mess of things”. Instead of promoting “unity” she´s dead set on promoting “rupture”. Her second lieutenant, France, does the same, only in a more subtle, less Teutonic, way. I think the Economist has it right:

For another insight into Mr Sarkozy’s thinking about Europe, one should listen to an interview he gave a few days earlier, at the end of the marathon-summitry in Brussels at the end of October:

 I don’t think there is enough economic integration in the euro zone, the 17, and too much integration in the European Union at 27.

The reason being:

France, or Mr Sarkozy at any rate, does not appear to have got over its resentment of the EU’s enlargement. At 27 nations-strong, the European Union is too big for France to lord it over the rest and is too liberal in economic terms for Frances protectionist leanings. Hence Mr Sarkozy’s yearning for a smaller, cosier, “federalist” euro zone.

Apparently, trying to alienate Britain fits “naturally”.into that strategy.

So, could the US successfully, on its own, lead a “charge of the light brigade”?

David Beckworth is a staunch believer in the Fed being a “monetary superpower” (see here, for example). If that´s true, the Fed could go a long way in leading a worldwide recovery.

The charts below are interesting. I chart US industrial production and trade and emerging markets industrial production and trade. Note that all through the 1990´s the US “dictated the rhythm”, noticeably helping emerging markets recover after the Asia crisis of 1997. In the early 2000s the “baton” was transferred to the emerging markets – read China after it joined the WTO. But the production and trade weight of the US (around 20% in both categories) is very significant, so if it could somehow “recover” from its “depression”, it would have a significant impact on world economic activity, maybe even helping the EU “get its act together”.

That´s, implicitly, what Benjamin Cole, a staunch believer in NGDP targeting, is saying in his guest post at Lars Christensen´s blog. And he´s someone from outside the profession, so has no “ax to grind”:

 There are times in history when caution is not rewarded, and for the crafters of monetary policy, this is one of those times.  What appears prudent by old shibboleths is in fact precarious by today’s realities.   Feeble inaction, and stilted moralizing about inflation are not substitutes for transparent resolve to reinvigorate the United States economy.

Market Monetarism is an idea whose time has come.  It offers a way to prosperity without crushing federal deficits, and offers regime stability to the American business class.

The only question is why Bernanke instead chooses the pathway cleared by the Bank of Japan.

To the last sentence I would add: given that at one time he was very critical of that chosen path!

3 thoughts on ““Winds of depression”

  1. Given a choice, I would rather live in the Japan of the past 20 years than Europe of the next 20 if the ECB fails to do its job.

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