I spied two articles recently that caught my eye. One was an Opinion piece calling for unbridled market driven economic growth (and a withdrawal from crony-centric, big government based socialism. The other concerns capital flows. The two topics and articles are related.
In yesterday’s US print edition of the Wall Street Journal, Brian Wesbury (Chief Economist at First Trust Advisors, LP) derailed an Opinion piece a call to arms. Enough, already, of the centralist “we know better” government guided economy. In fact he highlights some interesting data. The Euro zone is led by governments with some of the highest public spending, as a percentage of GDP. The US in contrast has lower public spending. Mr. Wesbury highlights the crowding out effect of public spending over private. He states the obvious, derided by socialists, that it is the private sector that creates wealth; public sector tends to re-distribute, not generate.
The second article was from the US print edition of Friday’s (October 10th) Financial Times. It too was a “Comment” piece, by Paul Tucker, a former deputy governor of the Bank of England, and senior fellow at Harvard university). His piece looked at how capital flows follow trade patterns and so grease the wheels of growth and progress. During periods like the gold standard and Bretton Woods, capital flows were closely monitored and even controlled, to help preserve exchange rate differentials and so support the idea of stable prices. Today capital flows are much freer to hunt for margin in near real time, almost globally. He also suggests that it is not just capital flow that define a nation’s place in the economic growth league tables, but the composition of its state balance sheet. Too much short-term debt, compared to its trading partners, could create an opportunity for capital flow. This then reinforces the imbalance that then only gets worse. Eventually something breaks. The challenge is perhaps well captured with “when cyclical or event based conditions become structural or long term conditions”.
The answer is not to control capital movements. That would slow down the cycle of investment and curtail organic growth and natural re-balancing processes. What the world needs now is a new Bretton Woods agreement, a Bretton Woods II, if you will. It needs some serious advanced and developing national collaboration focused on monitoring global imbalances and orchestrating the re-balancing of same. Such countries that need to work together include:
- United States
- Germany, representing the Euro, with French and Italian participation
This would be the first tier of collaboration. Other nations would play a smaller role in following this Bretton Woods II lead. Post Bretton Woods gave rise to the World Bank and the IMF. These organizations are doing a reasonable job of monitoring financial and economic events, but they have no executive authority and nor are the leading nations of the world taking heed of the advice being offered. We need action, not more reports.
The goal is not to establish capital controls. The goal is to work with the IMF and others to monitor and reduce global trade imbalances where possible, and/or manage the result re-balancing of financial reserves that results. This is not about saving the dollar’s status as reserve currency – it is about saving the global economy. I now can finally glean some of the understanding Keynes must have worked through as he was seen, by America’s Harry Dexter White, as someone trying to save the pound.
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