Thursday, December 09, 2004

Apocalypse Not Yet?

Debi White of Heart, Soul & Humor left a pointer in my comment section a couple of posts down. I've been thinking about this article for the past couple of days. Ultimately I think the falling dollar might be a greater danger for the United States than Iraq.

James K. Galbraith has many amazing ideas. I'm not sure I agree with all of them, but here's one we need to think about.

The big action, however, must come on the international side. My supply-side friends pine for the gold standard, and they make a serious point. The experiment of worldwide floating exchange rates, inaugurated by global monetarists in 1971, has failed disastrously. The world was better off when we had fixed exchange rates. Indeed, in the most successful arena of global trade and finance we have fixed exchange rates right now, thanks to the unappreciated but sensible dollar-pegging of the Chinese. Fixing exchange rates in Europe (through the extreme measure of creating a single currency) also proved a boon for the poorer countries of Europe, eliminating speculative currency risk. Even though, overall, European policy remains terrible, unemployment has dropped sharply in Spain and Greece since the euro came in.

Global fixed exchange rates would help developing countries, by sharply curtailing the destabilizing role of private currency markets. They would therefore also help us, by creating stronger and more stable markets for our exports. But there is no simple return to global fixed exchange rates. It would be a terrible mistake to create a system that imposed deflationary pressure on us and through us on the world as a whole—the problem of the classical gold standard. To get where we need to go, we must also recreate a global financial network oriented toward the support of development and growth. When we have that, growth policies around the world will help rather than hurt each other. At that point, we could profitably put real effort into reintroducing full employment economics to Europe and Japan.

A little shy on details, but you can't expect anyone to coherently describe a viable replacement for our current global economic system in a few sentences.

'we must also recreate a global financial network oriented toward the support of development and growth'.

That's the tough part. I can't help thinking it's only part of the problem too. As long as you only have engines to create growth, it seems the bubble economy will be recreated on a larger and larger scale. We need a way to regulate it as well, on a global level.

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