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Hot pools of money « Previous | |Next »
January 24, 2011

In The Monetary Threat to the Global Economy Jane D’Arista and Korkut Erturk say that much of the focus of crisis management policies so far have centered on resuscitating the financial system and injecting public spending. However:

Neither policy objective directly addresses the main source of global deflation, which is that the global imbalances are no longer being recycled effectively. The US has lost much of its capacity to absorb and recycle trade surpluses because both its households and banks face the ongoing threat of insolvency. That in a nutshell is the driving force behind the global deflationary trend. Substituting en-masse public spending for private consumption and putting banks on life support are at best stop-gap measures that cannot bring back what is broken. That is true even under the best case scenario where the confidence in the dollar holds up and banks are effectively cleansed of troubled assets.

The problem is not the global imbalances per se, but the unsustainable way in which they were absorbed and recycled.

The main challenge is to wane world demand of its dependence on US overspending given that the rising levels of both nonfinancial and financial debt has virtually destroyed its capacity to recycle global surpluses effectively.

Recycling trade surpluses or imbalances means that if you want to consume stuff from abroad, someone has to make it. And if it’s not going to be American workers, it’s going to be foreigners. But whoever it is, they wind up taking dollars when they sell it to the US. So pretty soon, these foreigners had a lot of dollars that they got in return for all the cheap goods Americans were buying at Walmart. The world was awash in liquidity. The enormous flow of money was recycled back into the US (through the big banks) and with the shift to financial deregulation, helped create America's massive debt pile-up.

As D’Arista anbd Erturk describe it:

it is not often recognized that the US credit boom that brought this about was at the same time perversely functional in recycling global trade surpluses. It was the means by which the ever expanding dollar reserves overseas could be loaned out in the US and, through US financial markets, to emerging economies and the rest of the world. However, as credit-induced investment/consumption booms could not be sustained for long in emerging economies, US households came to absorb an ever larger part of these global surpluses over time and thus became the epicentre of debt build up. This provided the fodder for financial innovation whichonly compounded the excessive credit growth that eventually wrecked households’ balance sheets and bankrupted banks

Hot pools of money flowing around the globe---liquid modernity are a pervasive source of global instability in that this instability of debt crisis is leading to declining standards of living around the world, which is resulting in civil and political unrest in Europe.

| Posted by Gary Sauer-Thompson at 11:52 AM | | Comments (1)


Might the writer add that Korkuk and D'Arista sound like avid Rowson fans?