Brad Setser has a typically thoughtful piece on the relative roles of summits and unilateral action in shaping the international econnomic system here.
Author: Kevin O’Rourke
As I was reading this excellent post by Brad Setser, I found myself thinking of Robert Triffin. And then I followed Setser’s link and found that that governor of the People’s Bank of China was explicitly stating that “The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists. ”
The Chinese are clearly getting worried, which is an important fact in itself. And what a world we live in, when a Communist central banker can come out so clearly in favour of Bancor!
Now, I guess you could argue that the role of China in the past few years has been much less passive than the Triffin analogy would suggest. Setser obviously thinks so. But it is good to see China putting proposals on the table whose ambition and multilateral orientation are appropriate to the scale of the current crisis. At one level, Zhou seems to be saying “give us some other reserve currency to hold, and the dollar can depreciate as much as it wants.” At another level, there is the proposal to partially pool reserves in the IMF, which would be “more effective in deterring speculation and stabilizing financial markets”. I would be fascinated to hear what people think.
Olivier Blanchard does not pull his punches here. European governments were too slow to realise how serious this crisis is, and they are not doing enough. Thanks to Eurointelligence for the pointer.
Remember last spring? It seems an age ago now. The fear then was of resource scarcity: of rising oil prices, and of rising food prices, as biofuels crowded out food production and population continued to grow. Environmental worries also reflect resource scarcity, albeit of another type. Once this crisis is over, whenever that is, all these concerns will inevitably come back on the agenda, and could easily dominate it for the rest of the century.
In that context, one of the most alarming news stories, to me, of last year, was that involving Korea’s Daewoo Logistics leasing almost half of Madagascar’s arable land on a 99 year basis. Here is a pretty positive account of the deal in Time magazine. Why my alarm? Because the deal reflected the fact that
“[Food-importing countries] have lost trust in trade because of the price crisis this year,” says Joachim von Braun, director of the International Policy Food Research Institute in Washington.
Thus, from a Korean point of view,
“We want to plant corn there to ensure our food security. Food can be a weapon in this world,” said Hong Jong-wan, a manager at Daewoo. “We can either export the harvests to other countries or ship them back to Korea in case of a food crisis.”
The latter quote, taken from this FT piece, should send shivers down the spine of anyone with a sense of history. (The article also makes it clear that the agreement was far less positive for Madagascar than had at first been reported.) Markets are a political institution. The deal they represent is straightforward: if you are willing to pay the going price, then you can buy what you need. When countries start to doubt whether that deal will remain valid going forward, and in consequence act to carve out sources of supply for their own exclusive use, the geopolitical consequences can be catastrophic.
As I contemplated this story, I idly wondered what would happen if, in a decade or two, some African or Latin American country decided that it wanted to renege on such a deal which had been struck by a previous government with, say, China or India. And so it was with considerable interest that I read this from the BBC. I don’t suppose the Koreans will invade Madagascar! But one can predict that this will not be the only occasion on which such a domestic backlash occurs. Why on earth would anyone assume otherwise?
The moral is straightforward. In addition to tackling the underlying problems of resource scarcity, we need to credibly commit to keeping international markets open over the decades to come. And in order to be able to do that, governments need to get the macroeconomics right, now. Otherwise, as the example of the Great Depression shows, this will just be a taste of things to come. And that won’t just be bad news for the economy.
No doubt we all noticed this article in today’s Irish Independent. Aside from the issue of whether great universities require great academics or great beurocrats (and the intriguing question of how come, in this trawl for world class talent, the people chosen are so often Irish), one needs to ask what price Irish universities need to pay to get great academics, assuming that they want them.
Presumably that price is falling rapidly, for several reasons. First, a little bit of googling suffices to make it clear that the academic job market is collapsing in the United States. The contributors to this blog will all be familiar with this AEA site listing cancelled or suspended job searches, and there are many more indicators available out there. Second, the high Irish property prices which were used as an excuse for high salaries are also collapsing.
And then there is the bigger picture. The state just can’t afford to pay enormous salaries any more. Moreover, there are obvious political considerations that can’t be ignored. Given that people at the bottom are going to see their net income fall, the case for a cap on all wages paid for in whole or in part by the taxpayer is becoming increasingly compelling. Many posts ago, I suggested a cap of 200K, but that now seems much too generous. 150K should be enough for anyone, and if people want to chance their luck on the national or international market places, good luck to them.