Peter Gallagher

Stephen Kirch­ner makes a strong case for learn­ing to stop wor­ry­ing and love global liq­uid­ity (nice job if you can get it…) bq. The notion that domes­tic demand should be con­strained by domes­tic pro­duc­tion is increas­ingly anachro­nis­tic in a glob­alised world. While many peo­ple grasp the welfare-enhancing nature of trade in goods and ser­vices, it seems that few can fathom that the same prin­ci­ples apply to global trade in cap­i­tal and labour. This is not sur­pris­ing, given that hos­til­ity to cross-border flows of cap­i­tal and labour is even more per­va­sive than hos­til­ity to free trade in goods and ser­vices. In part, this may sim­ply be due to lack of recent expe­ri­ence. Inter­na­tional cap­i­tal and labour mobil­ity is much lower today that in the late 19th cen­tury, despite all the talk about glob­al­i­sa­tion. Sin­ga­pore pro­vides a good exam­ple of a coun­try that is very open to trade in goods and ser­vices, but rel­a­tively closed to for­eign cap­i­tal through cap­i­tal account restric­tions and the fail­ure to inter­na­tion­alise its cur­rency. The moral panic over cur­rent account deficits is thus partly symp­to­matic of a closed econ­omy mind­set. It is this mind­set that is far more dan­ger­ous than cur­rent account deficits. (“Insti­tu­tional Economics”:http://www.institutional-economics.com/) I share Stephen’s phi­los­o­phy on this and agree that thanks to open global cap­i­tal mar­kets, the abil­ity to sus­tain per­sis­tent deficits on cur­rent account is sim­ply an expres­sion of mar­ket val­ues. Still…there’s no rea­son to believe that cap­i­tal mar­kets will get those val­ues right in par­tic­u­lar cases or that they will take up, or climb down from, their enthu­si­asms grace­fully. It’s a mat­ter of record that they don’t. No mat­ter how sophis­ti­cated the exchange mar­kets and their deriv­a­tives, in the real world adjust­ment is costly (in trade or finan­cial markets)—particularly when it’s rapid or unex­pected. I’m pre­pared to be cool about deficits, to avoid ‘moral panic’ about spend­ing uncon­strained by the value of pro­duc­tion, and to acknowl­edge the unar­guable ben­e­fit of an open and active global cap­i­tal mar­ket­place (for exporters as well as importers). But I don’t have to love “crack­pot fis­cal policies(link to Ger­ard Baker in the Finan­cial Times—subscription)”:http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1045511355071&p=1012571727092 (or “pol­icy vacuums”:http://www.inquit.com/article/321/the-great-sucking-sound-revisited) that force for­eign­ers to adjust early and often and threaten—one day, pos­si­bly—a spec­tac­u­lar adjust­ment squeeze in which we may all have to share.