EconoMonitor

Cognitive Dissonance and Global Macroeconomics

One of our readers not only suggested this post, but even sent me all the links; I’m just now getting around to writing it up. Thanks.

There has been a lot of talk about global imbalances, with most opinions varying from somewhat important (us) to very important (many global policymakers). Here’s Jean-Claude Trichet, for example, president of the European Central Bank, as reported by Reuters:

“The G20 has to address the issues of the domestic large imbalances between savings and investments, and of the set of unsustainable external imbalances.

“We know that these imbalances have been at the roots of the present difficulties. If we don’t correct them, we’ll have the recipe for the next major crisis. And this of course would be totally unacceptable.”

People agree what the biggest imbalance is: it’s over-consumption in the United States and over-saving in China, thanks to an artificially low renminbi/yuan, which creates an artificially high dollar.

Yet in the same statement, “Trichet said U.S. policy makers’ commitment to a strong dollar was important in keeping currency markets and the global economy stable, repeating a long-held position.” Separately, French finance minister Christine Lagarde said, “Everyone needs a strong dollar.” Tim Geithner, like every senior government official for decades, has been repeating that we have a “strong dollar policy,” whatever that means.

But if no one wants the dollar to depreciate — which is the standard solution to a trade imbalance — what does it mean to be against global imbalances? No one will come out in favor of tariffs. Using fiscal policy to encourage domestic sourcing of goods and services did not go over well with the Europeans. I guess that leaves exhorting Americans to buy less and save more, which is a little like asking Goldman to pay smaller bonuses.

So the EU complains about our huge trade deficits and overconsumption, yet at the same time (along with China) seems to desperately want us to continue to play that role. This is a convenient position, since it allows them to blame us  for the financial crisis, while continuing to export to us. (Germany, the largest economy in Europe, is surprisingly export-dependent, compared to the U.S. and the U.K.) Unfortunately, it’s also logically inconsistent.


Originally published at The Baseline Scenario and reproduced here with the author’s permission.

2 Responses to “Cognitive Dissonance and Global Macroeconomics”

GuestOctober 24th, 2009 at 12:17 pm

Replica Watcheshttp://www.prettyreplica.comReplica Handbagshttp://www.verynicebag.comFashion Watcheshttp://www.watchesbroker.comVery Nice Watchhttp://www.buynnicewatch.comDiscount Watcheshttp://www.prettyreplica.com/specials.htmlBest Watcheshttp://www.watchesbroker.comSpecial Watcheshttp://www.watchesbroker.com/specials.html

JC WEIDERT LuxembourgOctober 26th, 2009 at 6:28 am

I am appalled by the shallowness of this comment.I couldn’t possibly have postede by an ecoinomist.A higher savings rate in the US and a weaker dollar go hand in hand and are of course both part of what is needed to reduce “global imbalances”.However, to achieve this, the dollar must depreciate against the currencies of Asian high-surplus currencies, not against the euro. The US trade deficit with Europe is insignificant.

Most Read | Featured | Popular

Blogger Spotlight

Dan Steinbock

Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond). In addition to his advisory activities (www.differencegroup.net), he is affiliated with major US universities as well as international think-tanks, such as India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore).

Economics Blog Aggregator

Our favorite economics blogs aggregated.