The Global Economy and Its Two-speed Transmission
I know, I know; I haven’t said one optimistic thing in two, no, three years, at least. Believe me, I wish I had a reason to put my rosy goggles on, but it’s just that I have yet to find an outfit that would go with them. Verdi composed an aria on the topic of women’s fickle nature, so I’ll use that as an excuse for the simple fact that the color we wear is all about the mood we’re in. (Not that I agree with the ultimate cynic, the Duke of Mantua, the callous playboy who sings La donna è mobile, that women are fickle at all. Quite the contrary; I mean, who is he to talk?) But back on the topic of my dark moods, the fact remains that I keeping wearing all shades of grey and black for a number of reasons; the latest being the trend of world central banks’ increasingly choosing different paths in the way they are dealing with the aftermath of the crash of 2008 and the recession of 2009.
Now, I’m not calling for another dip…yet. But it does seem that the lasting global recovery is not around the corner. It may not be even around the next block or even in the same city. What I’m trying to say is…it is most likely far off on the horizon, and here’s why I think that.
Two years ago, around this time, the leading world economies banded together and made a precedent by slashing interest rates in unison, and some into virtual non-existence. Today, however, central banks seem to have split along the lines of the haves and the have-nots. As a result, and depending on which side of the great divide they have ended up, the world economies are diverging further and further apart in terms of how they are responding to the stalled recovery through policy action, reaction or, in the case of some countries, neither.
It seems that major players also like to come up with catchy terms to describe various trends. I have already written about the term “currency war,” coined first by Brazil’s finance minister, which went viral in a matter of hours. Now, some watchers of central banks around the world are coming up with car-references when describing the latest trends, such as that the global economy has a two-speed transmission—one for the crawlers and one for the gallopers. As it so happens in this topsy-turvy world, the “crawlers” are developed economies and the “gallopers” are emerging economies.
Unlike two years ago, there is no unison now. The crawlers—particularly those saddled with current account deficits—promote monetary easing, seeking to depreciate their currencies to make their goods more attractive to their trading partners. The gallopers, on the other hand, seek tightening and/or stopping with the stimulus. What neither side seems able to agree on is whether to let their currencies appreciate or depreciate. Why? Well, everyone would like to export as much as possible and import as little as possible to fix their balance sheets. Of course, this standoff is not going to be easily resolved.
The dichotomy that has been growing for about a year now will take much longer to resolve. The global growth is in the process of rebalancing and it is still at a risky juncture. The recovery is a complex function of numerous interdependent factors that need to resolve themselves within one complex equation. But the trouble is that some variables of this equation are moving too fast, such as quantitative easing among the crawlers and stimulus withdrawal among the gallopers, while an equally critical element—the boosting of the domestic demand in Asian countries, such as China and India—is not filling the void. This is how the global imbalances persist and why the debate on the timing of policy decisions persists. Knowing how to balance macroeconomic short-term growth with long-term health is an art, just as it is an art knowing how to equate consumer spending with consumer deleveraging.
So, how are policy-makers expected to deal with this many conundrums? There are no easy answers, other than that, for this whole mess to play itself out, it will not take months or quarters. More likely, we are talking about years, perhaps even decades. So perhaps the best thing anyone can do, from policy-makers to politicians to ordinary people, is to be patient, to get used to the fact that the days of quick fixes are over and hope that policies put in place today will indeed bear fruit down the road.