All this is a long way of saying that the great global reflation after 2001, which Martin, Larry and others celebrate, is more fragile than they suggest. But the fragility is not mainly to do with the risks of a protectionist shift in policy. It is to do with what happens in the intersection of the international trade regime and the international monetary system. The inattention to the real sources of the current fragility is eerily reminiscent of the inattention to the real sources of fragility in the East Asian economies in the years approaching 1997. Then too analysts looked at headline growth rates and projected them into the future, overlooking the source of the oncoming crisis – fast growth financed by foreign debt, in combination with fixed exchange rates. Today we are in uncharted territory in terms of the size of the current global imbalances and their rate of increase. Yet the consensus about what to do is locked in to ‘more liberalization’, ‘avoid protection’. It is as blinkered as the consensus among economists in the early 1930s that soaring unemployment was voluntary.
“Martin” is the FT’s Martin Wolf. “Larry” is Larry Summers. And Wade sounds like another member of the Armageddon Gang. They’re everywhere! They sound scarily rational! And while Wolf’s retort, reproduced in part below, is entirely sensible, I’m afraid I don’t find it entirely convincing:
The big point, however, is that in a world in which some countries want to run large current account surpluses (or simply happen to have excess savings), someone has to borrow. The fact that the borrower is now the world biggest and most creditworthy country, with the best capital markets and a good central bank, which issues the world’s key currency (in which all the country’s debt is denominated) is a source of stability for the world system, not a source of instability. …
So I stick with my view: provided the engine of the world economy continues to run, we can manage any likely financial instability. There may well be some years of painful adjustment ahead. But they should not lead to the kind of destructive reversal we saw between 1914 and 1945.