In spite of all the drama that is unfolding on the international stage, the path to a better global economic environment is fairly simple.
First, the U.S. should maneuver its fiscal position with a long-term deficit reduction goal in mind (not short-term rash actions), while shifting the mix of policies toward investment projects and education rather than pure consumption.
Then, Europe should face up to its responsibilities and issue a Eurobond which is really the only solution to save the Euro if that is indeed the ultimate policy goal; otherwise, all the European talking heads should announce a press conference and tell the whole world that they were just kidding about a common currency and now the joke is over.
Then last but not least, China (and most exporting economies) should shift their systems toward increasing domestic demand rather than pursuing merely mercantilist policies.
If these three steps could be undertaken, the whole world would witness an amazing period of high growth and improving global standards of living (and, yes some higher commodity prices as well).
Unfortunately, the cumulative imbalances of all the policy mistakes of the last 15 years and the reality of today’s politics is condemning the whole world to a seemingly never-ending cold winter in classic Kondratieff style.
In an almost surreal fashion, our beloved leaders are pursuing the exact opposite policies in a futile attempt to perpetuate their own special interests and the short-term survival of their personal power. In this framework, global leadership is producing rushed and unbalanced austerity plans, growing global balance of payments dislocations and out of control monetary policies. Savers are robbed through financial repression (read: artificially low yields), honest investors are hit with higher than necessary volatility, genuine entrepreneurs are forced out of the system by uncertainty of rules and regulations and a disappearing of real opportunities.
In this context we have to look forward now to the notorious Jackson Hole meeting, where all the most important financial alchemists will converge this weekend for a few days of brainstorming. Last year, Chairman Bernanke utilized this forum to launch Quantitative Easing Part Deux, which, just like in a bad movie sequel, failed to spark economic activity and/or lasting increases in asset prices. More liquidity is clearly not the answer in a balance-sheet recession like the one we are experiencing, but this will not stop central banks from giving a hand to their commercial/investment banking friends.
Growth and a subsiding of assets volatility will not come back to the markets until somebody stops the madness (or better: the stupidity). Markets are dysfunctional because they mirror dysfunctional political systems and political players and dysfunctional monetary policies.
Time to reset …
