Counterparties: The economics of flying blind
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The leaders of the G20 met in Washington today; their official communique was sent out, like any grand pronouncement, as a Word document posted on a Russian website.
The world’s most powerful finance ministers and central bankers appeared to be working through some serious confusion today. Even India’s finance minister seemed a bit puzzled by all the talk of Europe: “It was supposed to be a G20 meeting, but for a moment I thought it was a G7 meeting”, he said.
Three days after a grad student dismantled the widely-held idea of a 90%-of-GDP tipping point for national debt, the G20 agreed to move away from the idea of setting specific national debt targets. This a big change — just three years ago, the G20’s richest nations pledged to cut their deficits in half by this year. Now, as Reuters notes, Europe is not just re-thinking austerity, but promising to slow it down.
The IMF, which previously endorsed Britain’s austerity program, has now changed its stance on debt. That may augur a direct confrontation with the Cameron government. Just today, the UK had its credit outlook downgraded by Fitch, in part because of a “weaker fiscal and economic outlook”.
Mohamed El-Erian blames the IMF for some of the global policy confusion. While he admires the Fund’s “highly respected” analysis and “world class insight”, he says that policy implementation “frequently falls hostage to pressure from its political masters in advanced economies.”
His case in point: during the Cyprus crisis, the IMF signed on to a flawed rescue plan, then quickly retracted its support. The “IMF felt it had no choice but to succumb to pressure by European politicians,” El-Erian writes. Neil Irwin, on the other hand, applauds the IMF for changing its mind on debt and says that the IMF has now become the kind of friend who urges you to work less and drink more. (At the end of a long week, we at Counterparties appreciate those kind of friends.)
The G20 bigwigs also seemed unsure about the effectiveness central banks’ easy monetary policy. On Friday, there were no G20 objections to Japan’s two-year $1.4 trillion monetary stimulus program. But the FT’s Chris Giles says that, after years of low rates and stimulus, the world’s central bankers feel they’re effectively flying blind, in an “environment of uncertainty about the way economies work and how to influence recoveries with policy”.
Ex-ECB executive board member Lorenzo Bini Smaghi summed up the meetings. “We don’t fully understand what is happening in advanced economies,” he said. — Ryan McCarthy
On to today’s links:
And, of course, there are many more links at Counterparties.