As much as I have been a consistent critic of Geithner in his role as one of the chief enablers of the banking industry, he deserves credit for this succinct remarks at the G-20 via Bloomberg (hat tip reader Scott):
In a sign of tension among the world’s economic policy chiefs, Geithner flagged concern that others are turning to cheaper currencies and fiscal restraint, leaving their rebounds reliant on foreign rather than domestic buyers for strength.
“Stronger domestic demand in Japan and in the European surplus countries” is needed, Geithner said in a June 5 press briefing in Busan. “The value of the G-20 is to help each of us individually recognize the importance of economic policies that are in our broad collective interest.”
The conundrum is that governments are all trying to harness a rebound in trade, which the Netherlands Bureau for Economic Analysis last week estimated grew 3.5 percent in March, more than double February’s pace.
His comments highlight a related issue. The oft-cited Reinhat/Rogoff work on financial crises shows a strong correlation of high international capital flows with more frequent and severe financial crises. While it is in theory possible to have robust international trade without large international capital flows, that would require countries to run only small trade surpluses and deficits.
In the wake of a period of high international capital flows and increasingly intense financial crises, the remedy seems to be not merely to go back to status quo ante, but for a region that had been close to being in trade balance, the eurozone, to endeavor to go into a large surplus as a way to finesse addressing its internal imbalances. Needless to say, this does not bode well for economic stability.