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2009-10-07

Differing situations and imbalances

Comments on Mohamed Ariff “World economy not quite out of the woods yet”, 6/10/2009, http://www.eastasiaforum.org/2009/10/06/world-economy-not-quite-out-of-the-woods-yet/

It is likely that the story of decoupling of developing economies at least some major Asian ones from developed economies in terms of recovery may be holding.

So as the author argued that "it is unsafe to make sweeping generalisations, as conditions vary from country to country", that argument applies equally to cautions for being too optimistic and being pessimistic.

In light of that, it could be argued that the G20 statement that it is too early to withdraw stimulus is problematic, because of the differences between the member economies in terms of their recovering status. It has given some activist governments the excuse to indulge in their unnecessary delays in prudently managing their economies that will leave future problems to those economies.

Another point is that the so called international imbalances seem to be red herring. It is more an issue of a blaming game to find a scapegoat for the financial and economic crisis that had a fundamental cause of mismanagement of the economy by irresponsible lending practices and the inability of the authorities to manage asset markets and government finance using the traditional macroeconomic policy instruments such as monetary and fiscal policies.

To argue that international imbalances were the causes is no different to arguing that everyone or at least every household should run a balanced income and expenses every year or more extremely every day. Isn’t that ridiculous? Or are there any differences between the two?

One of the main roles of financial and capital markets are to bridge the different situations between different participants, so that people can run “deficits” or “surplus” over a sufficiently long period as long as the longer term budget constraints can be satisfied.

The argument of imbalances ignores this simple financial principle or function and is illogical.

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