Denying Imbalances, G20 Risks Chaos – Part I

Date: 04-11-2011
Source: YaleGlobal

After the Asian financial crisis in 1997-98, a group of developed and emerging economies came together as the G20 to stabilize global financial markets. With widening imbalances caused by huge trade surpluses on the part of some nations while others drown in debt, the global economy is perilously close to chaos. Now the eurozone – specifically and immediately, Greece and Italy – is in danger of default. In crafting a €1 trillion rescue fund, Europe’s leaders look to China as a white knight who could rescue the euro. This YaleGlobal series examines the challenges in stabilizing the global economy. In the first article, Shen Dingli of Fudan University insists that cooperation is essential to easing massive imbalances. The US focus on currency exchange rates and an undervalued renminbi overlooks fundamental imbalances, including demand by the world’s wealthiest consumers for low-cost products and China’s own immediate concerns with inflation and a shift of jobs to other Asian nations. Attempts to slow China’s rise with congressional pressure, protectionism or misguided confrontation won’t restore jobs in Europe or the US. – YaleGlobal

The US and China should focus on cooperation and balancing trade, rather than confrontation

How Austerity in Europe Works

 

Author: Edward Harrison · November 3rd, 2011 · RGE EconoMonitor

This post describes how austerity works in the European Monetary System where the euro is used as a currency. I will start by framing the difference between currency users and currency creators, then move to how central banks and government spending affect the economy to make it clear what is happening now in Europe.

Understanding government money is crucial here because in any economy using state money like the euro zone, government creates the currency unit of account to operate throughout the system. This currency is a promise to repay a specific amount of the currency unit of account backed by nothing but taxing authority. In state money systems, the government chooses a money of account and then imposes tax liabilities in that unit. It then issues the currency used to pay taxes.