Department of "Huh?!" (London Economist Edition)
The Economist notes that the problems of the hyper-Keynesian emerging markets are the problems of full employment and prosperity, while the problems of anti-Keynesian Europe are the much worse problems of the edge of depression:
The world economy: Three-way split: [T]he performance of the world economy in 2011 depends on what happens in three places: the big emerging markets, the euro area and America.... These big three are heading in very different directions, with very different growth prospects and contradictory policy choices....
Begin with the big emerging markets, by far the biggest contributors to global growth this year. From Shenzhen to São Paulo these economies have been on a tear. Spare capacity has been used up. Where it can, foreign capital is pouring in. Isolated worries about asset bubbles have been replaced by a fear of broader overheating.... [M]onetary conditions are still extraordinarily loose....
The euro area is another obvious source of stress, this time financial as well as macroeconomic. In the short term growth will surely slow, if only because of government spending cuts. In core countries, notably Germany, this fiscal consolidation is voluntary, even masochistic. The embattled economies on the periphery, such as Ireland, Portugal and Greece, have less choice and a grim future.... [T]he financial consequences of a shift to a world where a euro-area country can go bust are only just becoming clear.... The euro zone’s political leaders, alas, are a fractious and underwhelming lot. An even bigger mess seems all but certain in 2011...
But is their bottom line that America should emulate emerging markets and--with nominal GDP 10% below trend and unemployment kissing 10%--plump for more immediate economic stimulus? No:
America’s economy, too, will shift, but in a different direction. Unlike Europe’s, America’s macroeconomic policy mix has just moved decisively away from austerity.... America is injecting itself with another dose of stimulus steroids just when Europe is checking into rehab and enduring cold turkey.
The result of this could be that American output grows by as much as 4% next year. That is nicely above trend and enough to reduce unemployment, although not quickly. But America’s politicians are taking a risk, too. Even though their country’s long-term budget outlook is famously dire, Mr Obama and the Republicans did not even try to find an agreement on medium-term fiscal consolidation this week. Various proposals to fix the deficit look set to gather dust (see article). Bondholders, who have been very forgiving of the printer of the world’s chief reserve currency, greeted the tax deal by selling Treasuries. Some investors, no doubt, see faster growth on the way; but a growing number are worried about the size of America’s fiscal hole. If those worries take hold, the United States could even see a bond-market bust in 2011...
