Martin Wolf Assumes the Mantle of Jeremiah
And he warns a feckless and accursed crew of policy makers:
FT.com / Comment & analysis / Columnists - Martin Wolf: Do not put off imbalances correction: Many agree, therefore, that the US is solely to blame for its huge current account deficits. But the US is neither as potent nor as profligate as its critics suppose. The challenge is global....
[A]nalysts have advanced two contrasting views of what is driving the global pattern of surpluses and deficit. The first is that the fiscal deficits of President George W. Bush and monetary laxity of Alan Greenspan, Federal Reserve chairman, have caused the US external deficits. The US is chronically under-saving, rather than the rest of the world over-saving. The alternative view is that the driving force has been an increase in the surplus of savings over investment particularly in emerging Asia and, more recently, in the oil exporting countries. These surpluses have been channelled to the US as borrower and spender of last resort.... Regular readers will know that I have long taken the second of these views.... This is not a blanket defence of US policy: its structural fiscal deficits are perilous. Yet, it should not be hard to accept that countries with large current account surpluses bear at least as much responsibility for global “imbalances” as those with the deficits....
[T]he WEO makes the following observations.
First, across the world as a whole, global investment and savings rates have tended to fall since the early 1970s.
Second, while investment rates have converged... savings rates have not....
Third, Asian countries both save and invest a much higher share of GDP than other emerging market economies and than oil producers....
Fourth, China’s savings rate is now running at close to 50 per cent of GDP. Government savings are close to 12 per cent of GDP, household savings at 16 per cent and company savings at 22 per cent....
Desirable adjustment would then see higher investment in many parts of the developing world, higher savings in the US and a smooth shift in the global pattern of deficits, all without a significant recession. The WEO itself analyses three scenarios: a benign market-led adjustment, a malign adjustment and a policy-driven adjustment.
Under the first, US savings rise and the dollar depreciates by a further 15 per cent, in real terms. There is also some slowdown in US economic growth. But the current account deficit falls to a sustainable 3 per cent of GDP.... The more abrupt market-led adjustment assumes rising protectionist pressures, a loss of confidence in US assets and abandonment of exchange-rate pegs. This generates a significant slowdown in the US. The dollar experiences a sharp decline and US inflation jumps, generating a sharp rise in interest rates.... Growth slows sharply....
Finally, the WEO explores policy options.... [F]iscal consolidation in the US, leading to a balanced budget by 2010, lowers the current account deficit by about 2 per cent of GDP over 10 years. The WEO looks at structural reform in the eurozone and Japan, which generates an investment boom. This helps adjustment, but considerably less than US fiscal consolidation.... [T]o be confident of a benign adjustment one needs changes in policies in several places at once... significant movements in real exchange rates, higher savings... higher spending... particularly in emerging Asia. The result would not only be more balanced global growth, but each region would be better off.
Is this benign outcome likely? No...
Ever since the Mexican peso crisis of 1994-1995, I have been well aware that the Gods of the Dismal Science are cruel and capricious, at times punishing small sins against them with disproportionate retribution.
