from Follow the Money

Tim Adams, the new Treasury Under Secretary for International Affairs

August 2, 2005

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is at least making the right noises ... 

The informal institutions that help govern the global economy - institutions like the G-7 -- do need to evolve.  

So do the formal institutions for global economic governance (shameless plug).  Asia remains underrepresented as the IMF.

To me, the question of China's full participation in the informal institutions like the G-7 is harder than updating IMF quota shares to reflect Asia's rise.   China, after all, is still nominally communist and still doesn't really allow private ownership of land.  And China is most certainly not a democracy.  The G-7 traditionally has been a club of big democracies as much as a club of the world's largest economies.

Tim Adams thinks his job is to anticipate the next crisis, and to try to ward it off.  That is right.  But I doubt the Treasury staff will have all that much trouble finding the leading candidates for the next crisis.

Think countries with large and growing current account deficits.  Or countries with large and growing domestic debts, political scandals and large exposure to the swings in commodity prices that might accompany a global downturn.

Adams takes office in a relatively quiet period, in the sense of no major financial upheavals ongoing, but indicated no complacency.

"My job is to worry about all things at all times so I see this period of quiet time as a time to try to anticipate where the next possible crisis may erupt and to try to preventive steps to keep it from occurring or, if it does, to try to limit its collateral effects on other economies," he said.

Adams said much of his job will be "continuing to monitor global imbalances, better understanding what's driving them and taking whatever appropriate steps we can to make sure that adjustments are in place so that adjustments can occur in a gradual manner that is not disruptive to markets."

I am not sure the drivers of global imbalances are much of a mystery right now either. How about:

  • Asian (particularly Chinese) resistance to currency appreciation, along with relatively weak consumption growth in the world's largest and most dynamic emerging economy;
  • Oil exporters saving a decent share of a seemingly ever rising oil windfall;
  • US fiscal deficits;

Bernanke's thesis is that the US outsourced savings because the rest of the world saves so much.   Others say the world would not save so much if central banks were not intervening so much.  And it would not be able to save as much without the stimulus to their income provided by profligate US consumers and a US government that spends more than it takes in, even in good times ...

Either way, the broad outlines of a solution are not that hard to see, though they are hard to carry off.  The US has to save more. Germany needs to consume more.  And China has to consume much more.   And provide more of a stimulus to demand in the advanced industrial economies, not just to commodity exporters.  See Mr. El-Erian

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