China, U.K. Budget: Two Sides of the Same Coin – The Source – WSJ
Posted by on June 25th, 2010
By David Cottle
The causes of the financial crisis will be fomenting academic strife and keeping book publishers busy long after we who lived through it in the West have gone, debt-laden, to our graves; headstones bought and paid for with a last loan.
But one thing at least is certain: The world economy had become seriously unbalanced in the early years of the 21st century. And this was very bad. “Globalization,” before which so much of Western business genuflected, turned out to mean the West borrowed and spent while Asia saved and built. this essential “round tripping,” where emerging markets supported demand for their goods by lending to the old world, reached its inevitable tipping point.
Supposedly chastened and wiser, leaders of the largest national economies came to London in April 2009 to pledge lessons would be learned and actions taken. this Would never Happen again. Then, well, nothing much happened. And so the chief imbalance in the global economy, between the West and China, is arguably as dangerous now as it was in 2007.
True, the U.S. trade balance showed some improvement as long as U.S. GDP was contracting, but the deficit is increasing again now domestic demand is rebounding. China’s surplus has shrunk over the past few months but, apparently, only reflecting substantial stockpiling of raw materials. China is still accumulating the assets; the West the liabilities.
And so we come to two events seemingly unconnected, but in reality two sides of the same coin: China’s announcement that the yuan’s peg to the dollar is to be abandoned and a more flexible exchange-rate regime sought, is one. [Read our latest coverage here.] The U.K.’s emergency budget, awaited with trepidation by a nervous public, is another.
Here is rebalancing, painful and complex.
China is accepting, however obliquely, that its currency needs to be stronger. The U.K. is about to embark on a painful spell of cold turkey from its addiction to borrowing.
And here, too, is the problem with that rebalancing. It’s going to take a long time. it has to.
China’s move has not been bought uncritically by economic commentators; most feel it’s just a minimal sop to developed-market opinion before the G-20 summit in Canada at the weekend. it may be. But, summit or no summit, export-dependent China can only move towards a fully flexible exchange rate in baby steps; steps which can be retraced if necessary should they prove too risky or too destabilizing.
And the new U.K. government may wish to reduce the size of the state dramatically, but too much of the U.K. economy now is the state. It’s going to take a very long time to cut it back, as it will across Europe, where austerity now rules.
In these volatile times, investors tend to cheer signs that we are “getting back to normal” after an extraordinary last couple of years. this is odd because they really don’t want that; a return to “normal” would just be the trailer for Credit Crunch 2. They should, rather, cheer efforts at rebalancing, and hope that economics can wait for the snail’s pace politics will impose on them because there’s really no Plan B.
China, U.K. Budget: two Sides of the same Coin – The Source – WSJ
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