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Stiglitz on the global economy « Previous | |Next »
January 9, 2008

Most of the op-eds in the back page of AFR are usually in the free market vein with strong warnings about the dangers of government intervention, union control, and picking winners (yes, you guessed it, renewables). Reform is generally coded as economic reform, and it means more deregulation, less tax and greater privatization of public utilities. On many ocassions we have had spin and publicity for the nuclear industry disguised as an op.-ed. The quality of these pieces varies; many of them not that high, even when they are downloaded from the US.

So it is with some relief that we find an op-ed written by Joseph Stiglitz, that has been downloaded from Project Syndicate on the global economy and economic governance. Two passages stand out:

the good times may be ending. There have been worries for years about the global imbalances caused by America’s huge overseas borrowing. America, in turn, said that the world should be thankful: by living beyond its means, it helped keep the global economy going, especially given high savings rates in Asia, which accumulated hundreds of billions of dollars in reserves. But it was always recognized that America’s growth under President George W. Bush was not sustainable. Now the day of reckoning looms.

He then goes through the reasons: China is facing inflationary pressure; the prospects for the US consumption binge continuing are weak; and it is not clear that workers will continue to wear declining standards in the name of uneven globalization.

Stiglitz adds that the one positive note is that the sources of global growth today are more diverse than they were a decade ago. The real engines of global growth in recent years have been developing countries. However:

slower growth – or possibly a recession – in the world’s largest economy inevitably has global consequences. There will be a global slowdown. If monetary authorities respond appropriately to growing inflationary pressure – recognizing that much of it is imported, and not a result of excess domestic demand – we may be able to manage our way through it. But if they raise interest rates relentlessly to meet inflation targets, we should prepare for the worst: another episode of stagflation.

He finishes on a sobering note: If central banks go down this path, they will no doubt eventually succeed in wringing inflation out of the system. But the cost – in lost jobs, lost wages, and lost homes – will be enormous.

| Posted by Gary Sauer-Thompson at 4:49 PM | | Comments (2)
Comments

Comments

Gary, what's the alternative to raising interest rates? How else can inflation be slowed?

cutting government expenditure so less is spent.

Over $20 billion was spent in a shopping spree in November.Then we have December and January. December is estimated to be around $40 billion. Domestic demand is powering ahead despite increased interest rates and fuel prices.

Underlying inflation is running at 3.4% which is above the RBA's comfort zone (or target band). Swan has got problems. Those tax cuts promised during the election campaign don't help.