I tread warily on Eric’s turf, but this is too much to resist. David Leonhardt lays out, in today’s Times, the gamble which most of the world is about to undertake:
The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.
The risk, of course, is that the same thing will happen that happened in the period 1936-1938. Then, premature fiscal tightening put a bullet in the head of the still shaky recovery, and the world economy collapsed back into depression. There is, now that you mention it, a book about this.
But now Things Are Different. For example, “Back then, however, European governments were raising their spending in the run-up to World War II. This time, almost the entire world will be withdrawing its stimulus at once.”
Ah. Well, but some things are different and improved, right? “The initial stages of our own recent crisis were more severe than the Great Depression.”
Hmm: still looking. No, wait! Leonhardt quotes Adam Posen, an economist working for the Bank of England on potential strengths of the system now that didn’t exist then. They are “China, India, and the relative health of the financial system today versus the 1930s.” This leads Posen to the ringing endorsement that “The chances we’re going to come out of this O.K. are still larger than the chances that we aren’t.”
Whew, I feel better. China will rescue us!
Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery.
Is it too late to buy gold?