Every country for itself

Martin Wolf is the star economics writer for the UK’s Financial Times. Today on her blog Naked Capitalism, Yves Smith dissects Wolf's latest column about the conflicting interests of the world’s two greatest exporting countries, China and Germany (or "Chermany" as he dubs them), and just about everybody else. Wolf says these two otherwise very different nations are in agreement that the world needs to keep buying their products but should stop borrowing so much. This message, says Wolf, is “incoherent” and pursuing such a strategy is a sure fire formula for deflation, the bogeyman of the Great Depression.

Smith agrees with Wolf that the austerity this would impose would be both disastrous for the borrowing countries (e.g. the Unites States) but would inevitably reduce China and Germany’s exports. The bottom line is that China and Germany are right that the continuing trade imbalance is unsustainable but their solution is no solution at all. They are trying to put the problem and the solution entirely on their trade partners but it’s not going to work.

What’s happening, according to Smith, is that all the participants in the global economic mess are each trying to resolve it on their own terms which, of course, can’t possibly work. An international problem needs an international solution but thus far there’s not much interest in that because politicians are listening only to their own constituents--a sure path to disaster. In Smith's words:

This battle of wills is rooted on every front in domestic politics, plus a collective inability to recognize that our current version of globalization is no longer workable. But we appear likely to test the current system to destruction rather than come up with less drastic ways out.