Brittan: Are the imbalances on the mend?

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The FT‘s Samuel Brittan on whether international imbalances are a problem:

The morals I drew were, first, that the onus of proof was on those who regarded it as a problem, and second, that many of the advocated remedies could be worse than the disease….

Yet such is the perversity of humanity that governments could make the imbalances into a problem where none existed before. If the deficit countries are to reduce their deficits, they have to switch resources from home markets to exports or import saving activities. It would be lovely if this could be done painlessly without impinging on output and activity. But a substantial structural change of this kind does require some sort of domestic slowdown while resources are being switched.

The danger, in a nutshell, is that central banks and governments are so assiduous in promoting domestic growth that they will not tolerate a few quarters of lacklustre GDP performance. In that case, deficits will never be allowed to contract properly and will become a problem which they might not have been to start with. All I can suggest is that, in their regular interest rate decisions, they should err on the side of caution.

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