Consider the following substantive issues, each of which individually and regionally I _have_ heard discussed in the press in recent years. For the US: 1) savings presently riduculously low, largely due to excessive consumption, must increase; 2) the US Fed must cease and desist from excessively accomodative rates and credit creation, presently pursued for substantially domestic political reasons in contravention of all good financial governance; and 3)the US fisc must raise the revenue necessary to support at least its present level of expenditure, to say nothing of for needed further expenditures. For China (and less directly other major emerging sovereign exporters): 1) currency values must adjust to more nearly rational relationships to GDP, in the present case rise; 2) some portion of industrial expansion should be focused more on domestic demand to decrease destabilizing foreign currency denominated capital flows; and 3) coordination of macrofinancial policy in China needs to be more closely coordinated—i.e. negotiated—with other primary industrial actors [a G10 or something like it]. For the EU: 1) government subsidies of major exporters—read Airbus and agriculture among others—to offset high regional labor costs needs to decline if not end; b) revenue week Club Med statelets need to, like, get real and raise enough to fund their debt at sovereign levels; c) labor laws need to loosen enough to get full[er] employment going to stimulate regional demand.

Now, I’m not necessarily advocating all of these positions, personally. And each and every one of them are huge domestic political hot potatos which would be difficult to implement in isolation, and have no little pain attached to implement at all. However, I think it a fair summary to say that a consensus exists for all of them, if not a uniform one, that these would be _desirable_ outcomes, both regionally and globally. The observation, which El-Erian skirts but I suspect because it’s very old hat to him, is that these positions are, of course, _interlinked_. All of them are predicated upon each of them, that is they feed each other even if each policy is supported for specific, discrete reasons. It may be disingenous to say that policies favored individually by consensus imply a comprehensive consensus on the direction of global financial policy, but that is the sum of the positions if I’m following this correctly.

And I do think that El-E’s ‘prisoner dilemma’ reading of inaction on this interlinked problem set is accurate: no one will act alone to take the pain, particularly when they can’t be sure the other major actors will follow through. This is why we need a real global forum for _hard and binding bargaining_ on joint implementation. We won’t get it until after the US banking system crashes; we may not get it for ten years. In the end, we WILL get a joint global negotiation on this through; it won’t likely be held at Bretton Woods, or the Plaza Hotel, but it will codify the new ‘Rules of the Game’ when the time comes. What I don’t know is who will propose and facilitate the meeting? It won’t be the US, because we have the most to lose, and any new agreement will manifestly be less favorable to us than the rules we have explointed to our present prediciment. I’m betting the Europeans will propose it. If the Chinese were really, really smart, THEY would propose it but have it held in the US, just like the Japanese did twenty years ago. I don’t think they are that confident yet, whether they are that smart.

And Yves, the issue with ‘high growth, low inflation, and some measure of stability,’ to me, is the high growth part. The industrialized world is addicted to ‘incessant, inevitable growth,’ in part because we waste so much, most especially because the illusion and occasional reality of growth allows Big Capital to keep the issue of income distribution off the political bargaining table. This is why we have growth: to keep the carrot before the nose of the donkeys as they trudge to the mill in the early morn. If we ever have the donkeys realize that the boss owns most of the carrots and keeps them, we can get away from this ‘high growth’ mania and its attendant destabilization. But if not, then, yes, I’m with you: attempts to grow big, hold down inflation, and stay stable are foredoomed.

To PrintFaster: I’m with you on Volcker. We have had a debt backed currency since his tenure, and a policy of using rates to simulate rather than stimulate growth, the same basic macrofinancial policy for a generation. Each administration exploited the situation a little more than the last, until by Dubya II we are floating higher than a loony tune.

And PeripheralVisionary: ” . . . [L]ower levels of trade and capital flows are inevitable.” I don’t think that they are inevitable, now, but lower capital flows are assuredly desirable, which implies that lower trade levels will follow. Big Money wants big growth, and to them that means big trade, and increasingly big money churn, so they are going to have their way until they’ve killed most of the money. Another ten-twenty hears of decreasing returns in fits and starts, _I_ think, but we can start planning and advocating for an alternative now.

I’m aware I’ve got the orthodox economic causality in reverse, but I’ve never been able to believe in it, particularly at the operational level.

The fact is that all international trade transactions are settled immediately via the international capital account (i.e. via money, which is classified as an international capital account flow).

E.g. each marginal Wal-Mart purchase from China represents a marginal contribution to the US current account deficit, settled by the export of dollars that in turn become the offsetting capital inflow to the US. The absence of an offsetting trade transaction in this example sustains that net capital inflow. The fact that the Chinese central bank then uses those dollars to buy bonds is a downstream operational aspect of China’s money management of its surplus. It’s a consequential portfolio allocation decision. I find it hard to visualize that PBOC’s bond purchases cause marginal buying at Wal-Mart, because it contradicts the reality of the order in which international trade transactions are actually settled via the monetary system. So net trade flows cause net capital flows.

Conversely, gross capital flows that are not the result or reallocated result of net trade flows are also settled with money and offsetting capital flows (both at the operational transaction level and the macro accounting identity level.)

There are other debates about the subject – such as savings glut versus money glut – but none of these seems quite right – and it remains a debate.

Opponents of drilling in United States waters are equally passionate in their arguments, saying that drilling for oil off the coast poses environmental risks and that drilling for finite supplies undermines long-term conservation solutions. They also say modest supplies of additional oil would not necessarily lower gasoline prices in the United States because oil is traded on a world market

Agreed, I do not follow the reports on trade as you but I have not seen even a trial balloon on the issue of trade imbalance.As of this moment I think the world is waiting, very nervously, for the next administration in DC.

I have not read even one economist that says these deficits are sustainable. The question is how do we go about initiating a credible answer to this problem.

I would suggest tariffs. Your thoughts?

Agreed that quite a few economists have highlighted the global imbalances problem. However, my quibble is that El-Erian suggests that there was a consensus about what to do among the key actors that never got done. His own WSJ op-ed, by articulating the hopeful view that the imbalances will sort themselves out over time, in some ways contradicts what he is saying now.

And the IMF statement you helpfully provided, while having some common elements with what El-Erian outlined, differs in material ways. Reducing aggregate demand in the US is broader than mere fiscal consolidation. China could argue, correctly, that it has gotten more flexible on exchange rates. The idea of financial sector reform circa 2005, which would have entailed more nations moving to the Anglo-Saxon model, now means something pretty different now, even if one were to invoke the same words.

Perhaps I am misunderstanding which discussion you are referring to, but hasn’t Stephen Roach been writing about the need to address these global imbalances for years? And I don’t think he was alone… a quick search turns of this IMF communication for example:

http://www.imf.org/external/np/sec/pr/2005/pr0587.htm

“The Committee reiterates that all countries have a shared responsibility to take advantage of the current favorable economic conditions to address key risks and vulnerabilities. To ensure orderly adjustment of global imbalances and to help achieve more sustainable external positions and stronger medium-term growth, the Committee calls for concrete actions by all to implement the agreed policy response in a timely and effective manner. This includes fiscal consolidation to increase national savings in the United States; greater exchange rate flexibility as appropriate, supported by continued financial sector reform, in emerging Asia; further structural reforms to boost growth and domestic demand in Europe; and further structural reforms, including fiscal consolidation, in Japan.”

Foreigners buying our credit is simply mattress stuffing. It must be returned to the US for dollars or dollar denominated assets. When it does, it either becomes inflation, or is destroyed by tax surplus collections. I suppose it could be rolled over yet again.

As for needing a recession, I will differ. What will cure the current accounts/trade deficit is domestic production as a substitute for foreign production. In some measure an autarky, or at least a balance if there are sufficient exports.

The big impediment to US production is the total lack of capital for production. It sometimes seems that US production capital is consumed by MBAs and lawyers, not to mention doctors with high medical care insurance expenses. Basically, production today requires heavy automation and that requires lots of capital. The more wall street friction on capital, the less there is for production.

Basically, I am saying we need lots of domestic capital, and we have none. So I guess in that sense we need an accelerated savings, but given current tax indebtness, there will be no savings for years. Federal debt will simply need to be destroyed. It cannot be collected.

I beg to differ. We will run current account deficits as long as we run capital account surpluses (ie, we are importing capital from abroad, by selling Treasuries and whatnot to foreign investors). We will in turn import capital as long as our domestic savings rate is as low as it is.

Consumption as a % of GDP is 70-71%. That’s a remarkably high level. We need to get consumption down substantially in order for us not to be dependent on foreign capital inflows. That challenge is made worse by our growing fiscal deficits, thanks to Iraq and Bush’s tax cuts.

A reduction in consumption of the magnitude needed to square our accounts means a recession. There is no way around this.

I just read this FT article on Goldman’s SIV restructuring: http://www.ft.com/cms/s/0/db9ed2e0-3bd5-11dd-9cb2-0000779fd2ac.html

“The Cheyne restructuring, which has been brokered after nearly 10 months of negotiations, will require the receivers to organise an auction of the Cheyne assets in the coming weeks, to establish a transparent price for these instruments. This is important because in recent months it has often proved impossible to value these murky assets.

Once this price is established, Goldman will then create a new off-balance sheet vehicle to buy the assets, with the transfer of assets being funded by the US bank for just one day before being sold on to the new vehicle.”

Does this sound to you like a genuine price establishing auction? Do you know that these SIVs are chockfull of bank equity (under the moniker bank loans, but the banks get to report the “loans” on their balance sheets as capital)?

Has Goldman finally found a way to create that price obscuring super-SIV after all?