All well in Jackson Hole
This looks like a good conference to miss this year. The world’s central bankers gathered at their annual junket in Jackson Hole over the weekend to conclude that inflationary pressures are subsiding, and that the crisis was transitory. The FT reports that Fed chairman Ben Bernanke thinks that global inflationary pressures are starting to ease as a result of falling oil prices and the rise in the dollar. A rare dissenting voice was that of Axel Weber of the Bundesbank as saying that persistent inflation risks remain in the euro area. There appeared to be a consensus among central bankers that the crisis is not about to end soon (unlike last year when the same group forecast that the crisis would be over by Christmas!), though most agreed that the crisis would eventually dissipate without causing great damage to the global financial system. Bernanke’s comments suggest that US interest rates will remain at 2% for the foreseeable future. The FT also report that the UK economy ground to a halt in the second quarter, as sterling fell to a two-year low against the dollar of $1.8507.
Buiter versus the US establishment
The Naked Capitalism blog has a nice discussion about what appears to be a characteristically blunt performance by Willem Buiter at Jackson Hole, where he effectively accused the Fed, the hosts of this event, of cowtowing to Wall Street. Buiter’s comments draw fire from the entire US economics establishment, who by and large believe that the Fed has done a great job, including Frederic Mishkin, and former Fed vice chairman Alan Blinder. (Even Jean-Claude Trichet apparently came to the defence of the Fed, according to Les Echos). Buiter’s arguments arguments are not new, but the blog gives a nice expose of some of the big philosophical differences.
The case for a global approach to inflation
Writing in the Financial Times, Adam Posen and Arvind Subramanian argue that the central bankers should have agreed a global accord to beat inflation, with a joint public commitment to tighten monetary policies. They dispute the view held by many central bankers that little is to be gain by economic policy co-ordination. They argue that global inflation is caused by negative real interest rates and global excess demand, which is partially driven by declining potential output growth in the US and Europe. The authors are particularly critical of the moral hazard game played by some authorities, notably China, which hopes that the fight against global inflation will be carried by others. Such a strategy is both unfair and unworkable, as it destroys credibility.
Summers on the global economy
Writing in the FT, Larry Summers says that the end of the US consumer of last resort as a pillar of global economic growth requires global economic policy co-ordination. It is all well and good to demand increased US savings and a fall in the current account deficit, he writes, but there is no alternative unless alternative measures are put in place. He says managing the US’s economic policy may turn out to be the single most important issue for the next president, even though it is not an election issue.
Mundell on a new Bretton Woods
Robert Mundell, in an interview with Frankfurter Allgemeine, says that the system of free floating global exchange rates was doomed, and that the world was moving towards a grand agreement on exchange rate stabilisation. He advocates concretely as a first step that the five major currencies – dollar, euro, yen, yuan, sterling – should be stablised in respect of the special drawing rights. He favours a conference to be held in Shanghai by the year 2010 to reach a wider agreement on exchange-rate stabilisation.
Schmieding on the euro
Writing in Frankfurter Allgemeine, Holger Schmieding argues that the euro’s strength against the dollar was now largely over, as the US economy is recovering, due largely to a massive export boom, while the European economies are slowing down. Europe’s real estate crisis are, if anything, worse than in the US, and the ECB has added to the problem through an excessive tightening of interest rates. He predicts a rise in US interest rates towards 4% by 2010, and a return of the euro/dollar exchange rate to $1.15/1.20.
Why the euro area may be more robust that meets the eyes
Writing in the FT Ralph Atkins says the euro area appears to have stabilised in third quarter, and that reports of its fall into recession are greatly exaggerated. He lists twelve reasons, including, relatively stable labour markets, a relatively benign housing slowdown, and some statistical factors that appeared to exaggerate the slowdown in Q2. (He also calculated that the euro area had more gold medals that than the US or China).
ECB to test stricter liquidity rules
FT Deutschland reports that the ECB is considering to tighten its liquidity rules to prevent a possible abuse of its generous arrangements by banks desperate to offload dodgy securities. Yves Mersh, the Luxembourg representative on the ECB’s governing council said a rule change was under consideration within the next few weeks. This follows criticisms that banks were able to use securities as collateral which they were not able to sell in the open market.
Gerlach on inflation targets
Writing in FT Deutschland, Stefan Gerlach says that this is not the time to adjust the ECB’s inflation target, but after the high rates of inflation subsides, perhaps in a year or two, there may well be a case to modify the current target of HICP inflation of “below but close to 2%”. The problem is not the absolute level of the target, but the lack of precision. Furthermore, the ECB is likely to continue to overshoot the target, which would damage its credibility. He advocates a point plus band target, say 1.75% plus-minus 1 percentage point.
Peyrelevade attacks Sarkozy
Jean Peyrelevade, former chairman of Credit Lyonais, launch a sharp attack against Nicholas Sarkozy, acusing the French president of repeating the same errors in his economic policies as Francois Mitterrand did in 1981. He tells Les Echos that Sarkozy is fundamentally wrong in his attempt to rest his economic strategy on more consumption, rather than on deep structural reforms to improve the country’s productivity and potential growth. He is particularly critical of Sarkozy’s failure to undertake substantial budgetary reforms.
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