## Friday, November 30, 2007

### The wheels of global general equilibrium adjustment are in motion

Ila Patnaik has an article in Financial Express today on the global rebalancing that's underway. It's a very interesting time in international economics. On this subject, also see:

1. Summers sounds amazingly Keynesian when it comes dealing with current US economic vows...contrary to bitter medicine he administered other countries in trouble in the 90s, when he was a policy maker.

Ajay, do you have any thoughts on economic decoupling - US vs Asian,if any? Is it fairly in line with Ila's? Andy Mukherjee had a confusing column, to me anyway, on decoupling. Rebalancing should help set the stage though...

2. Didn't get the following line in Ila Patnaik's piece

"the Chinese Yuan is undervalued and is a one-way bet that is attracting massive capital inflows through both legal and illegal means."

An undervalued currency should attract fewer capital inflows rt? Unless investors perceive a massive appreciation to be inevitable.
Considering the huge forex reserves at China's disposal, they should be able to sustain their weak-yuan policy!

3. Sir -

Do you think cutting interest rates is the right solution in case of the US economy?

What will be the right approach -

option A - encourage spending on credit by lowering interest rates ?

OR

option B - encourage savings and discourage spendthriftness by hiking interest rates (the assumption here is that with higher cost of finance and generally stifling economy people might think of saving rather than spending mindlessly).

The effect:

option A - as rightly pointed by Ms.Patnaik - stagflation, recession + inflation, but also a completely 'fear-less' consumer who knows well...that in the end the FED will not let us all go to the BIFR (so to say).

option B - recession + drop in consumption, a correction in demand-supply mismatch and therefore lower prices. Further drop in the USD vis-a-vis other currencies, leading to improved demand for US goods, reduction in deficit..etc etc.

--

Sir, what's your take on this?

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