Not to depress you or anything, but we’ve been down this road before

Let’s review why the current state of play on efforts to get the global economy out of recession is freaking me out: UBS projects that the total stimulus from fiscal expansions will be around 1.5% of global GDP.  That’s short of the 2% goal of the IMF and will not “meaningfully boost global growth next ...

By , a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast.

Let's review why the current state of play on efforts to get the global economy out of recession is freaking me out: UBS projects that the total stimulus from fiscal expansions will be around 1.5% of global GDP.  That's short of the 2% goal of the IMF and will not "meaningfully boost global growth next year." It's possible that the UBS estimate was optimistic.  As Wolfgang Munchau writes in the Financial Times:  "The electoral timetable in the US has delayed an effective policy response and I fear that the new economics team of President-elect Barack Obama will be too much focused on domestic stimulus and not enough on global co-ordination. The Europeans and Asians, meanwhile, are unbelievably complacent."  Indeed, the Germans have now announced that they'll wait for President Obama to make the first fiscal move before they do anything strenuous on this front.  According to the FT's Raphael Minder, Asian exporters are renewing efforts to undervalue their currencies:  With plunging exports and economic contraction overtaking inflation and liquidity as concerns, Asian central banks are starting to buy dollars, raising devaluation worries. Patrick Bennett, Asian currency strategist at Société Générale, said there was evidence that central banks in Singapore, Malaysia, India and South Korea had started dollar buying “in the last couple of days”. HSBC has highlighted “a shift to depreciation policy”, notably in Thailand and Taiwan, which recently bought dollars for the first time since August 2007 and April of this year respectively. The Asian Development Bank gave warning last week that “we need to avoid unnecessary and excessive interventions in the foreign currency markets, especially to depreciate domestic currencies”. Writing in this week’s FT, Michael Pettis, finance professor at Peking University, expressed caution about “a grave risk” that Asian countries would seek to force overcapacity adjustment on to trading partners through currency depreciation and other trade-related measures. A restriction of global trade is not going to happen through traditional means, like high tariffs.  It's going to happen through domestic content rules on any fiscal programmes and on currency manipulation.  [Um... any good news?--ed.  Well, I suppose it is encouraging that the developing world has its financial house in sufficient order that it can engage in fiscal expansion.  But that's about it.]

Let’s review why the current state of play on efforts to get the global economy out of recession is freaking me out:

With plunging exports and economic contraction overtaking inflation and liquidity as concerns, Asian central banks are starting to buy dollars, raising devaluation worries. Patrick Bennett, Asian currency strategist at Société Générale, said there was evidence that central banks in Singapore, Malaysia, India and South Korea had started dollar buying “in the last couple of days”. HSBC has highlighted “a shift to depreciation policy”, notably in Thailand and Taiwan, which recently bought dollars for the first time since August 2007 and April of this year respectively. The Asian Development Bank gave warning last week that “we need to avoid unnecessary and excessive interventions in the foreign currency markets, especially to depreciate domestic currencies”. Writing in this week’s FT, Michael Pettis, finance professor at Peking University, expressed caution about “a grave risk” that Asian countries would seek to force overcapacity adjustment on to trading partners through currency depreciation and other trade-related measures.

A restriction of global trade is not going to happen through traditional means, like high tariffs.  It’s going to happen through domestic content rules on any fiscal programmes and on currency manipulation.  [Um… any good news?–ed.  Well, I suppose it is encouraging that the developing world has its financial house in sufficient order that it can engage in fiscal expansion.  But that’s about it.]

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner

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