Moral panic” in capital markets

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”: 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)”: (or “pol­i­cy vacuums”: 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.

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