Monday, June 07, 2010

Tim Duy: Lost Chance for Global Rebalancing

by Calculated Risk on 6/07/2010 08:35:00 AM

Professor Duy is not happy: A Good Crisis, Wasted

It is official. The rest of the world assumes the economy can pick up were we left off in 2006, with the US as the driver of global demand. And it is apparent there is little US policymakers can or will do to counter the trend. Once again, crisis - and along with it the opportunity to rebalance global growth - is wasted.
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Don Geithner [is] tilting at windmills. His battles are futile. Financial markets know it, sensing that the global growth cannot be sustained on the back of the US alone. Of course, this was always the case; demand in the US alone was never sufficient to recreate the fabled "V" recovery of the 1980s. Market participants also know that US policymakers have their finger in the dam of a tidal wave of competitive devaluations. The Dollar, for all its warts, remains the big dog of reserve currencies, and Geithner fears the global pandemonium that would result from an actual US response to the currency manipulation of others. Thus the postponed report on currency manipulators becomes another case of "extend and pretend."

In the end, why continue to hold the Euro on what is increasingly the myth of global rebalancing? It is clear European policymakers want a weaker Euro, and US policymakers are powerless to prevent a stronger dollar. At least we are getting cheaper oil as a result.

When it all shakes out, the US will actually be asked to do more, not less.
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Where does this all leave us? The rest of the world is intent on pursuing a begger thy neighbor strategy, with the US being the neighbor. I suspect US policymakers will eventually relent; it will be the only choice left. All we can do now is sit back and wait for the inevitable explosion in the US trade deficit, waiting idly by for the next crisis and the "chance" to bring some sanity to the global financial architecture.
Not only are we headed back to the pre-crisis imbalances, this suggests that unemployment in the U.S. will stay elevated for some time.