Financial fragility and deglobalization

In a lucid article, Harold James warns that while the “1929” problem has been solved, in the US at least, by the combination of Keynesian spending and monetarist money creation, the “1931” balance sheet problem of financial distress which requires micro-economic restructuring, not macro-economic stimulus and liquidity provision, is much more difficult to tackle and that the solution cannot be imposed from above by an all-wise planner.

Moreover these problems are easier to grapple with in large states, but smaller, more open countries such as Greece and Ireland, or even Taiwan, Chile, New Zealand, and others, find it harder to apply Keynesian fiscal policies, or pursue autonomous monetary policies. And especially, I would like to add, when they voluntarily renounced such policies by entering the eurozone. A return to financial nationalism - deglobalization - is thus to be feared.

And as a consequence, international economic dynamism has shifted to the newly “Big Really Imperial Countries” (BRIC): Brazil, Russia, India, China.

The whole paper is well worth reading in the Financial Times .