It's nice to see Financial Times columnist Martin Wolf championing works from the Levy Institute, i.e. Wynne Godley and others, The US Economy: Is There a Way Out of the Woods? Nov 2007, [PDF] . I'm a big fan of the Levy Institue's work, and have frequently pitched their policy briefs, reports, and working papers here. Wolf:
Who will pick up the thread after the great unwinding?, Martin Wolf, FT.com, Nov 20: … A plausible view of the future, then, is that the US will experience a lengthy period of sluggish growth in domestic private demand, partially offset by fiscal expansion and an improvement in net exports. It is via the latter effect, moreover, that monetary policy should have its principal impact, since households are unlikely to borrow much more while their houses decline in value.This is the great unwinding. So what does it mean for the rest of the world? It means that the rest of the world will adjust either by increasing demand, relative to potential supply, or by reducing its supply relative to demand. The former adjustment is clearly the more desirable.
Will it happen? The good news is that the build-up of foreign currency reserves and accompanying desire to prevent currency appreciation, by keeping interest rates down, are themselves expansionary. The resulting “overheating” is part of the solution, not part of the problem. If this overheating becomes bad enough, governments may allow still faster currency appreciations: perhaps even the Chinese will finally realise the error of their interventionist ways.
The great unwinding is a turning-point for the world economy. The rest of the world — and the emerging markets in particular — must now become the demand engines of the world economy. Will they do so? This is the big macroeconomic question to be answered over the next few years. …
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