K-12 Tax & Spending Climate: After the Crisis: Macro Imbalance, Credibility and Reserve-Currency

Dr. André Lara Resende:

High rates of growth, based on the increase in consumption of the mature economies of first-world countries, cannot be sustained for a prolonged period. First-world countries have low or zero demographic growth, an inverted demographic pyramid and already very high standards of living. The maintenance of a high rate of consumption growth depends, both on the creation of new consumption needs and on the permanent expansion of credit to families with ever higher levels of debt. The rich central countries consume, financed by ever higher levels of debt, in order to satisfy ever more artificial needs, with products made in China, which controls its labor costs and buys raw materials from emerging countries. No need of a profound analysis to conclude that in the long run this model is unsustainable.

There are two currents of interpretation of the present crisis. The first emphasizes a deficiency of the regulatory framework. It argues that it was such deficiency that ultimately led to the excess of leverage in the financial system. The explosion of ingenuity that followed the development of contingent contracts, the so called "derivatives", and the securitization of credits transformed the financial system from a relationship oriented system into a market transaction oriented system. It should have been more and better regulated in order to avoid the resulting excesses. The second current emphasizes the presence of large international macroeconomic imbalances. Obviously both interpretations are at least partially correct, but they are above all complementary. The macroeconomic imbalance would not have been so deep and persistent without the extraordinary development of the financial market. Indebtedness and leverage would not have reached such extremes in the world without the international macroeconomic imbalance. To accept that both interpretations are complementary does not necessarily lead to the conclusion that to redesign the regulatory framework is as important as to find a way to reverse the international macroeconomic imbalance. If promoted in a hurry and under the emotional impact provoked by the need to inject public money to limit the damage of recent excesses, a new regulatory framework carries the risk of being too repressive, geared to avoid errors of the past and not necessarily able to cope with the challenges of the future. It is easier to restrict and to prohibit than to adapt the regulatory framework to the impending challenges.[2] The design of a new financial regulatory framework, as important as it is, at this present moment, would not be able either to unlock the financial system, or to help the recovery of the world economy. The central question today is how to give a new dynamism to the world economy based on factors different from those that lead to the imbalances or the last decades. Which would be the institutional framework capable to guarantee a sustainable dynamism to the world economy without resuming and deepening the imbalances of the last decade?

Related: Top Chinese banker calls for US to issue Yuan debt instruments.

Posted by Jim Zellmer at June 9, 2009 1:01 AM
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