Friday, July 25, 2008

Harvard economist: "The global economy is a runaway train"

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard and former chief economist at the IMF, says rising commodity inflation is a sign that global economic growth is out of control.
The global economy is a runaway train that is slowing, but not quickly enough. That is what the extraordinary run-up in prices for oil, metals, and food is screaming at us. The spectacular and historic global economic boom of the past six years is about to hit a wall. Unfortunately, no one, certainly not in Asia or the United States, seems willing to bite the bullet and help engineer the necessary coordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up.

Instead, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policymakers in most regions have to start pressing hard on the brakes, not the accelerator. ...

I am puzzled that so many economic pundits seem to think that the solution is for all governments, rich and poor, to pass out even more checks and subsidies so as to keep the boom going. Keynesian stimulus policies might help ease the pain a bit for individual countries acting in isolation. But if every country tries to stimulate consumption at the same time, it won’t work.

A general rise in global demand will simply spill over into higher commodity prices, with little helpful effect on consumption. Isn’t this obvious? Yes, there is still a financial crisis in the US, but stoking inflation is an incredibly unfair and inefficient way to deal with it. ...

The historic influx of new entrants into the global work force, each aspiring to Western consumption standards, is simply pushing global growth past the safety marker on the speed dial. As a result, commodity resource constraints that we once expected to face in the middle of the twenty-first century are hitting us today. ...

This runaway-train global economy has all the hallmarks of a giant crisis in the making – financial, political, and economic. Will policymakers find a way to achieve the necessary international coordination? Getting the diagnosis right is the place to start. The world as a whole needs tighter monetary and fiscal policy. It is time to put the brakes on this runaway train before it is too late.
Just so readers aren't confused, even though the U.S. economy is currently slowing, it is the exceptional growth in emerging markets that is causing global commodity inflation.

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