Global Disorder and the Indian Economy

Jayati Ghosh

The world economy has clearly started on Act II of the possibly prolonged drama that began with the Great Recession of 2008-09. But if the Government of India is to be believed, the Indian economy is not likely to be very adversely affected by the current round of global financial volatility. Finance Ministry sources argue that the Indian economic growth story is so robust that the current uncertainty will cause no more than a minor blip in its confident trajectory.

But this is definitely an over-optimistic prediction, which makes one hope that the policy makers are actually more aware of the possible downsides, whatever their public pronouncements may be. One important downside is the likely diminished role of the US as a net importer. This is no longer a future possibility – it is already a process that is well under way and is likely to get even more accentuated in the near future. And it means that the rest of the world – including India – can no longer rely on exporting to the US as the means of generating growth in their own domestic economies.

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Is China Next?

CP Chandrasekhar

Though different, the Greek and the US public debt crises threaten a return to the Great Recession of 2008. The world is therefore savouring the reprieve provided by their temporary resolution. But before that ephemeral benefit could be enjoyed comes news of a potential new global economic threat from an unsuspected source: China.

Its source lies in the boom in China’s property market over the last few years, which gathered substantial momentum in the wake of the huge post-crisis stimulus provided by the government to the economy. With a significant share of that stimulus diverted to projects that increased demand for real estate, price increases have been so large that the spiral is now being identified as a bubble.

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How to Turn a Continent into A Subprime CDO

Mark Blyth

The European sovereign debt crisis is little more than a huge ‘bait and switch’ perpetrated on the publics of Europe, by their governments, on behalf of their banks. We need to remember that what we refer to today as the ‘European Sovereign Debt Crisis’ began as a private sector financial crisis back in 2008, when ‘too big to fail banks,’ writing deep out of the money options on taxpayers, quite unexpectedly (to some) blew up. Fearing a financial Armageddon, governments transformed private bank debt into public debt via bailouts, lost revenues, lower growth, higher transfers, and yawning deficits. The unavoidable result across the European continent was a massive increase in government debt. While painting this as a story of fiscal irresponsibility has some plausibility in the Greek case, it simply isn’t true for anyone else. The Irish and the Spanish, I and S in the eponymous ‘PIGS’ were, for example, considered ‘best in neoliberal class’ in terms of debts and deficits until the crisis hit. Public debt is a consequence of the financial crisis, not its cause.

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War without end? Rich countries fire the latest shots in the global “currency war”

Ilene Grabel

I’ve written on a few occasions about the “currency wars” and the divergent responses to its macroeconomic fallout by policymakers across the developing world. (For a primer on the issue, see my earlier posts.) Until recently, the currency war garnered little global attention—likely because of its geography.  The pressures generated by appreciating currencies were largely a problem for rapidly growing developing countries. The currency war was therefore not seen as a “universal” problem that threatened global financial markets, the world economy, or relations among powerful nations. This misguided view obviously failed to acknowledge that any hope for global recovery rests with the continued growth of the larger developing economies. The other factor that kept the currency war off the global agenda was the dismal state of the US and European economies.  Economic stagnation in these countries precluded much attention there to problems abroad that policymakers in the US and Europe could only dream about—too much growth and capital inflows.

But things are changing in ways that make it impossible to ignore the issue for much longer.  While investors remain pessimistic about the prospects of the US and European economies, they are nonetheless moving funds not just to the rapidly growing developing countries but also to wealthy countries, most notably Canada, Switzerland, Australia, New Zealand, and Singapore.  The currencies of these countries are now appreciating dramatically against the euro and the dollar. The Swiss franc reached all-time highs against the US dollar and the euro this year, the Australian dollar has hit three-decade highs against the US dollar, and the Canadian dollar is approaching record levels as well. Among the 16 major currencies in the world, the Swiss franc, New Zealand dollar, Japanese yen, Brazil’s real and Singaporean dollar have gained the most against the US dollar in the past three months.  A Swiss banker put it well last week: “The franc is like the new gold.” As in the developing world, asset bubbles, currency appreciation, inflationary pressures, and risk of a sudden reversal of capital inflows are weighing heavily on policymakers, manufacturers and exporters in a growing number of safe haven countries.

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War without end? Rich countries fire the latest shots in the global "currency war"

Ilene Grabel

I’ve written on a few occasions about the “currency wars” and the divergent responses to its macroeconomic fallout by policymakers across the developing world. (For a primer on the issue, see my earlier posts.) Until recently, the currency war garnered little global attention—likely because of its geography.  The pressures generated by appreciating currencies were largely a problem for rapidly growing developing countries. The currency war was therefore not seen as a “universal” problem that threatened global financial markets, the world economy, or relations among powerful nations. This misguided view obviously failed to acknowledge that any hope for global recovery rests with the continued growth of the larger developing economies. The other factor that kept the currency war off the global agenda was the dismal state of the US and European economies.  Economic stagnation in these countries precluded much attention there to problems abroad that policymakers in the US and Europe could only dream about—too much growth and capital inflows.

But things are changing in ways that make it impossible to ignore the issue for much longer.  While investors remain pessimistic about the prospects of the US and European economies, they are nonetheless moving funds not just to the rapidly growing developing countries but also to wealthy countries, most notably Canada, Switzerland, Australia, New Zealand, and Singapore.  The currencies of these countries are now appreciating dramatically against the euro and the dollar. The Swiss franc reached all-time highs against the US dollar and the euro this year, the Australian dollar has hit three-decade highs against the US dollar, and the Canadian dollar is approaching record levels as well. Among the 16 major currencies in the world, the Swiss franc, New Zealand dollar, Japanese yen, Brazil’s real and Singaporean dollar have gained the most against the US dollar in the past three months.  A Swiss banker put it well last week: “The franc is like the new gold.” As in the developing world, asset bubbles, currency appreciation, inflationary pressures, and risk of a sudden reversal of capital inflows are weighing heavily on policymakers, manufacturers and exporters in a growing number of safe haven countries.

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The Eurozone at the crossroads

Daniela Schwarzer

It is hardly three weeks ago that the political leaders of the Eurozone decided once more on seemingly far reaching measures to contain the spreading sovereign debt crisis. But within days, the intended effect faded away. Italy and Spain, the 3rd and 4th largest economies of the Eurozone, are on the brink of a situation in which they will not be able to refinance themselves on the financial markets and may have to call on the EU and the IMF to help them out with credits and guarantees.

The yields on Italian and Spanish bonds have almost reached the level of Greece’s, Ireland’s and Portugal’s when they had to start negotiating their rescue programs. Bond yields are in indicator for probable interest rates governments have to expect when they issue new bonds. Interest rates of 6-7 % for ten-year government bonds are widely seen as the upper limit for refinancing costs.

The sovereign debt crisis has hence escalated to a new level for which the Eurozone is not yet prepared. The measures taken by the special summit of July 21 were once again seen by market participants as being too little too late.

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A First Ever Default? Closing the Gold Window, Forty Years On

Gerald Epstein

During the recent “Debt Ceiling” debacle, many warned that the failure to lift the debt ceiling would lead to a “first ever” US default and to numerous financial catastrophes, including the demise of the U.S. dollar as the world’s reserve currency.

“First Ever Default?” Think again.

Forty years ago this month, on August 15, 1971, President Nixon “closed the gold window”, refusing to let foreign central banks redeem their dollars for gold, facilitating  the devaluation of the U.S dollar which had been fixed relative to gold for almost thirty years. While not strictly a default on a US debt obligation, by closing the gold window the US government abrogated a financial commitment it had made to the rest of the world  at the Bretton Woods Conference in 1944  that set up the post-war monetary system. At Bretton Woods, the United States had promised to redeem any and all U.S. dollars held by foreigners – later limited to just foreign central banks — for $35 dollars an ounce. This promise explains why the Bretton Woods monetary system was called a “gold exchange standard” and why many believed the US dollar to be “as good as gold”.  When Nixon refused to let foreign central banks turn in their dollars for gold, and encouraged the devaluation of the dollar which reduced the value of foreign central bank holdings of dollars, the Nixon administration effectively “defaulted” on the United States’ long-standing obligations ending once and for all the Bretton Woods System. (See the useful history by Benjamin Cohen and Fred Block’s masterful history of Bretton Woods, The International Economic Disorder published University of California, Berkley Press.)

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40th Anniversary of the end of Bretton Woods

Kevin P. Gallagher

Forty years ago today the United States ended the Bretton Woods International Monetary System.  This video shows then US President Richard Nixon making the announcement to the world:

No longer were fixed exchange rates the norm for the global economy.  Floating rates prevailed, and it was hoped that financial and currency markets would become more stable.  That has not been the case.  As we move into the fourth year of the global financial crisis a number of scholars and policy-makers have called for a new international monetary system.  Some call for a new global reserve system based on Special Drawing Rights, others call for a global GDP-linked bond, and others such as Ron Paul and Robert Zoellick long for those days of the gold standard.

What are your thoughts on this 40th anniversary of such a transformative event?  Where do we go now?