Brad Seter worries

So what do I worry about? The risk that China’s surplus will prove far smaller than announced – and that the fiscal stimulus won’t be strong enough to offset China’s domestic slowdown. China’s current account surplus could rise even as China’s exports start to fall if China’s imports start to fall even faster. I agree with Martin Wolf: China should, ideally, be doing more to stimulate its economy than the US, as that would help to facilitate global adjustment. Wolf writes: If the US external correction is to be consistent with global growth, demand must expand vigorously elsewhere, particularly in chronic surplus countries. The new administration should lead the world towards an understanding of a point that concerned John Maynard Keynes: it is hard to accommodate countries with massive and persistent current account surpluses. The counterpart deficits, if prolonged, almost always lead to financial crises. The way out is for most surplus countries to spend more at home. The expansion programme announced by the Chinese government early this week is just a beginning. Instead of toying with protection, the Obama administration needs to focus on global imbalances. The immediate way to deal with this challenge is to demand a global fiscal stimulus, with surplus countries implementing the biggest packages. I also worry about the risk that once current pressure on say Korea’s exchange rate diminishes, Korea will conclude that a depreciated won is in its own interest - -and resume intervening in the foreign exchange market both to rebuild its reserves and to support its export sector. Ragu Rajan of Chicago outlines this scenario in his contribution to VoxEU’s G-20 spectacular.* He writes: “If we do nothing to address this issue (the absence of sufficiently large multilateral pools of foreign exchange reserves) we will set up serious problems for the future. We will emerge from the crisis with many countries attempting to build reserves through export-led strategies and managed exchange rates, aggravating the demand imbalances at the heart of the current crisis.” A sustained effort to maintain undervalued exchange rates would tend to increase demand for US Treasuries. But it would slow needed adjustments in the global economy. I am still among those who thinks that a shortfall in foreign demand for US goods is a bigger worry than a shortfall in foreign demand for US Treasuries. *Dani Rodrik’s G-20 communique is also worth reading; alas, the odds that the actual communiqué will be as substantive are rather slim.

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