Blogs & Comment

Exit strategies and chronic imbalances

Now that a recovery is in sight, people are beginning to talk about unwinding the extraordinary stimulus unleashed to prevent the world from collapsing into a depression. The timing of the policy reversal is a critical concern, with many saying it shouldnt be too early or else well have a double-dip recession (like in 1937). But as Edward Hadas of breakingviews.comargues, it should also be done in a way that at least doesnt contribute to long standing and still unresolved imbalances in the world economy.
In a nutshell, chronic importers and borrowers like the U.S., U.K. and Spain need to de-leverage their economies more. That means they should accept low annual GDP growth rates of about 1% for several years, says Hadas. Returning to the 2% to 4% growth rates of past business upswings should not be on the agenda.
And chronic exporters and creditors like Japan, Germany, and China need to bring their domestic demand more in line with their productive capacity. In the case of China, I would add, they need to stop suppressing the value of their currency and let it rise against the U.S. dollar for their own sake (i.e. to temper overheating in their economy) as much as for the worlds sake.
Hadass viewpoint suggests that the spendthrift countries need to cut back onstimulus in sufficient degree. It also suggests, I would argue, a requirement to cutback earlier rather than later.
Letting the stimulus go on too long only repeats the errors of the past. What got the U.S. and the world into the mess of 2007 and 2008waseasy monetary and fiscal policies over previous years. They were not only dialed too high during expansions, but turned up too soon when downturns came along and turned down too late when upturns gathered momentum.