C.P. Chandrasekhar

The US is by no means the world’s most competitive or strongest economy, though the dollar remains its reserve currency. This intuitively contradictory feature in contemporary capitalism was seen as likely to sap the dollar’s strength, even if there was no clear alternative to it as a reserve currency. The threat to the dollar intensified with the onset of the 2008 crisis and the Federal Reserve’s response to that crisis in the form of an injection of huge volumes of cheap liquidity into the system. With the system awash with dollars, the currency was expected to slide. The evidence too pointed to a medium-term decline of the relative value of the dollar. Countries like China with substantial exposure to dollar-denominated assets were wary of suffering large losses because of the depreciation of the dollar.

What has come as a surprise, however, is the recent sudden rise of the dollar with a parallel fall in the value of a whole host of assets varying from equity to metals and gold which had emerged as the preferred safe havens for investors.

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Jayati Ghosh

The stupidity of the current macroeconomic stance in the UK is surprising in itself; but when combined with similar voices in Europe and the US, it is downright astonishing. Three years after the collapse of Lehman Brothers, the global economy is not going through a recovery from financial crisis, but simply entering act two after a brief intermission. On current form this play is a farce that will end in tragedy.

Policy discussion on both sides of the Atlantic is dominated by extreme fiscal hawks, who wrongly see public spending as the problem rather than at least part of the solution. The emphasis on fiscal rectitude is accompanied by the inability to rein in finance. All this condemns economies to financial instability, depressed and even contracting GDP and worsening conditions for ordinary citizens.

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Mark Blyth

I am currently writing a book about how austerity became the policy response to the crisis. One of the questions I struggle with in writing this book is how simple can you make the story without it becoming a children’s fable. In order to find out, I decided to write it up as a children’s fable (See below). I think it shows that when you strip it down to its essentials, it’s a pretty simple story, even if it’s a rather GRIMM (sic) tale.

The Global Crisis as a (Brothers) Grimm Story

Once upon a time in the land of US, the ‘job creators’ decided to send as many of the jobs they created as possible to THEM. THEM would make cheaper stuff to send back to US to buy, so more profits and cheaper stuff for US. Everyone wins! Yippee! So THEM made lots of stuff for US, and US sent THEM lots of cash to pay for the stuff they made.

But rather than spend the cash US sent THEM, THEM decided to give it back to US so US could buy even more stuff from THEM. THEM made even more money doing so, and sent it back to US!

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Matías Vernengo

The current policy consensus in the developed world (i.e. the United States and Europe) seems to be that fiscal austerity (the euphemism used these days is consolidation) is necessary.  Christine Lagarde, the new Managing Director of the International Monetary Fund (IMF), said recently in the Financial Times that: “fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.”

That is what she refers to as “Goldilocks fiscal consolidation,” that is, cut spending and increase taxes, but slowly please!  She repeated this view in her talk at the Jackson Hole conference, arguing that in order to obtain “credible” consolidation governments must implement: “measures that change the rate of growth of entitlements, health or retirement.”  In other words, cut spending and increase taxes fundamentally on social programs that benefit overwhelmingly the poor.

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