One country's meat.....

There's a simple principle in economics that what might be best for an individual might not, if repeated by every individual, be best for the group of individuals. It's the old prisoner's dilemma writ in another way, of course, and it's also a vital principle of Keynesianism. What might be right for the individual household ("tighten your belts!") depends, implicitly, on other households not doing the same. Margaret Thatcher, a chemist by qualification, never quite understood this, despite the simplicity of the concept.

Unsurprising then, to see that the G20 countries continue to head down this mad path of "tighten your belts". European companies are explicitly stating that (a) they will export their way out of trouble and (b) that they will do this via a weaker currency.

This necessarily assumes that one country (meet the USA) will carry on being the consumer of last resort, with a strong currency -- presumably printing even more bonds. Indeed, the "solutions" being put forward by European and Japanese companies, and by European countries, are only solutions for individual countries. It doesn't solve the global problem.

Jean-Claude Trichet continued his "Big Lie" campaign, claiming that fiscal tightening in Europe (this is the language that Germany wants to hear, so one can't be sure that Trichet actually means it) would increase investor confidence. This is a statement that could almost have been taken word-for-word from the early 1930s. And it remains just as much bollocks today as it was then. "Sound money", etc etc.

Bjorn Wahlroos, head of Sampo, lashes into the ECB, noting this morning that the ECB was

"desperately short of really good economists".

Oh dear. I mean, you expect this of governments, but I had the vague hope that some of the economists who knew what was going on might have ended up at the central banks.


Then again, Wahlroos might not be the best expert witness, 'cos he also said that

"this is not a sovereign debt crisis, but a crisis of confidence".

And I thought that we heard the last of that line over a year ago. Anyone who still believes that this crisis is non-systemic really ought to be taken away to la-la land.

So where ARE the decent economists? Or, at least, the ones that can understand some simple macro-economic facts. Well, Alvin Liew at Standard Chartered seems to have some idea:

"If everyone's expecting to export their way out of trouble, who will be buying?"

. Geithener has said that stronger domoestic demand is needed in Japan and Germany. Japan and Germany say "NO, we must tighten our belts!" Stephen King (not a pseudonym), chief economist at HSBC, said the same. "Where does stimulus come from?"

While Old-Europe economists state that a 10% drop in the euro will effectively boost growth by 0.7% a year, they fail to point out that the corresponding weakness of other countries would reduce the overall world benefit to 0.2%.

Basically, everyone is looking overseas for growth -- even the USA.

If the "belt-tighteners" win, the recipe looks set for competitive devaluations (lucky that the UK got their retaliation in first, I say!) and whispers of the need for "tariffs". I.E. Protectionism. The economic proof that protectionism, if practised by everyone, is bad for everyone, goes back more than a couple of centuries. Unfortunately the Free Trade advocates of the 19th century missed the flip-side to this. Just because if everyone practises free trade, everyone is better off, does not mean that, if the UK practises free trade but other countries do not, then we are still better off than we would be if we practised protectionism.

Dominique Strauss-Kahn, who seems to be emitting a small amount of sense, has effectively warned China and Germany that if the fiscal belt-tighteners win, it could cut global growth by 2.5pp a year.

So, where DOES the consumption come from? The ideal solution would, as I've said before, be for the Germans to stop wearing a perpetual hair shirt and start a bit of domestic demand stimulation, while the Chinese allow a gradual increase in living standards that isn't too large to bring about political instability. Oh, and we could all institute a porotectionist blockade against India.

But that last bit is just a personal gripe.

PS: Just got hold of Anatole Kaletsky's Capitalism 4.0. Not keen on the title, but expect a review here before too long.

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