Monday, April 19, 2004

BonoboLand - An Interesting Argument and a Possible Correction

Just a comment I made to one of Edward Hugh's posts at BonoboLand about the ZIRP problem.

BonoboLand - An Interesting Argument and a Possible Correction

"I don't see us escaping from the 'black hole' type characteristics of a global ZIRP environment any time soon. The difficulty is that the big indebtedness problem is primarily an OECD phenomenon. But any collective tightening across the OECD - apart from adding to the deflationary pain - would also drive up interest rates in the developing world, which is precisely where you don't want to do, at all. In fact quite the contrary."

Edward, in my opinion, the only way to escape from the ZIRP problem is to rebuild real global demand, especially in the really damaged countries, E. Europe, Russia, Africa, and L. America. The global TFP and ILO figures, charts, and graphs I have posted in the past clearly show the massive global shrinkage of these economies over the last twenty years and especially the last ten. Even if you slog through all the World Bank, IMF, OECD, and BIS data you will find the same story - a major lack of global demand in the 3rd world.

I say this problem can only be solved by the massive savings, balance of payments redirection, of major structural reform. It just seems to me as though no one has even considered the trillions of dollars there would be saved by rebalancing the currency system, which could be redirected to increasing real near bankrupt nations' demand, to reflate the world by demand created by improved balance sheets of the worst demand nations - again the nations mentioned above. We need the 3rd world to drag us kicking and screeming away from ZIRP - the OECD's don't have the capacity with the major deflationary drag of most of the entire 3rd world.

China, and the other E.Asian nations simply add to this deflationary drag by having their currencies pegged even lower than the rest of the 3rd world - this is no help. All nations' currencies are massively too far out of ppp + exchange rate equilibrium, at present, for our ZIRP problem to right itself - correctly, ie., without massive bubbles and crashes.

China using the reserve ratio tool to slow its economy is a case in point. Although they couldn't really use interest rate increases, because it would have exacerbated the problem by attracting unwanted funds, this ratio increase is the most dangerous tool to use, as it puts many balance sheets in dire circumstances and could quickly lead to internal financial trouble.

Finally, China, with the help of MNC's, creating excess global supply, on such massive scale, when the world is already suffering from a demand crisis is the most foolish development in economic history - short of wars. We have a global demand crisis, headed for a global debt deflationary spiral, of humongous magnitude - and the world can't yet see structural reform is necessary???

Where, oh where is Keynes? Davidson???

Edward, you know Davidson also mentioned a simpler quick solution to global imbalances - "the fixed exchange variant." This system simply works by all nations agreeing to write laws of currency re-balance over a number of years and then have the central banks of all nations act as market makers to maintain equilibrium within reasonable ppp + exchange rate balances. Quite simple, and works almost as good as exchange clearing if proper numbers are collected. Since the forties we have come a long way in collecting the data needed. I could even back this easy system - better than doing nothing, while Rome burns. ...Link

`29 Depression Era Comparisons
Pitfalls of Asian Central Banking

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