Thursday, March 05, 2009

Through the looking glass

The S&P is down again today and now traces -56.4% from peak-to-trough, the worst decline on record bar the Great Depression itself (-89%). For some sense for why we are in this world, and why the Obama administration has so far been unable to turn things around despite massive and ongoing transfers to wealth bankers, let's look at this post from Brad Setser:
A global stimulus shortage …
A great title.
China doesn’t exactly want to make it easy to evaluate the size of its stimulus. Bragging about the small size of your fiscal deficit — especially in relation to the US deficit — suggests a rather modest effort.
Yes it does. Federal deficits fund private savings, and if aggregate demand is falling because savings are increasing (as they are in the US) then small deficits are bad.
A bigger Chinese deficit after all would allow the US to run a smaller deficit without shortchanging global demand.
This gets to the crux of the problem -- Setser believes that deficits are bad per se and does not see the critical role they play in funding private sector saving. If they could be renamed "private sector savings" then you'd see how little sense it makes.
Given China’s current account surplus, its abundant domestic liquidity (the government – per Stephen Green of Standard Chartered) had deposits at the central bank equal to 9% of its GDP, and limited government debt (at least explicit debt), China could and should do more.
China should certainly help China, and the US should help the US. If the US funded private savings, China would be glad to soak up that deficit and continue to export its treasure over here. But by strangling domestic aggregate demand, the Obama administration is refusing China's offer of Manhattan for beads. Not wise.
And maybe it is: telling the state banks to lend to support local infrastructure projects could be considered a form of stimulus. It just isn’t the kind of stimulus that looks likely to spur China to consume more.
Obama's "stimulus" has exactly the same problem. First, households must save before they can consume. That isn't as Zen as it might sound.
At this stage, though, I would be happy if China just did enough to keep its current account surplus from rising.
And I would be happy if Obama just reduced fiscal drag in the US by declaring a payroll tax holiday. The US needs fewer barnacles on its economic hull.

“In proportion of GDP,” Jean Pisani-Ferry, director of the Brussels think tank Bruegel, wrote on the National Journal economics blog last week, “the size of the stimulus packages put in place in Europe [is] at best half the size of the U.S. and, unlike [the American effort] several of them are rear, rather than front-loaded.” While Germany’s spending will amount to 1.4 percent of GDP in 2009, French outlays will total only 0.8 percent, and Italy has not put forward any meaningful fiscal boost at all …
The lack of coordination amongst European central bankers means that they are even more unable to fund the European demand for higher savings with higher deficits. Things will get very ugly over there.


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