Germany is just stuck in the worst of worlds. If Greece leaves the Euro early, the chaos of capital flows are likely to overwhelm Europe and cause a more severe economic contraction. However, if Greece's exit is inevitable, then it may be better to do so now because the costs of an exit are only going to increase in the future.
A new paper on the history of global reserve currencies. Eichengreen and Mehl find that the US dollar overtook the UK's pound sterling much earlier than previously believed. The change in dominance took place in the 1920's and the US dollar continued its strength through the end of World War II. One of the key findings of the paper is that the US dollar was so successful because of the depth of the U.S. financial markets. In effect, because of the large home market in the United States, it was seen as more stable reserve currency. This has three important implications:
- First is that finance, in many ways, functions as an increasing returns to scale industry in the short run. As a result of a larger financial industry, a certain country may gain a comparative advantage in finance.
- The second is that larger currency unions, if stable, are more likely to be the base of a global reserve currency. This is interesting in the context of Europe, because those countries, although they are bound together, failed to foster a shift to a European reserve currency because of fundamental internal imbalances. Reserve currency status then becomes another key determinant in whether a currency union benefits or hurts a region.
- Third is that macroprudential policy will be increasingly important for the preservation of a reserve currency. Without that level of moderation to promote medium-term sustainability, financial markets aren't stable enough for reserve currencies to remain.
China's financial system is incredibly fragile. Although, on aggregate, capital is flowing into China, the flows could easily reverse based on the decisions made by a small population of affluent Chinese. To me, it represents another reason why fears about China should take place in the tail, and not the medium results. Growth is likely to be in for a bumpy landing, but if not it is likely to collapse. Hard.
Perhaps manufacturing is special. Its recovery has been quite strong in the recent recovery, and it may bode well for the furthering of science and engineering in the United States. The fact that manufacturing firms played such a large role in increasing spending in research and development creates possibilities that manufacturing really is special in an age of otherwise stagnation.
A credible argument against the Sumner critique of monetary policy. Is there a possibility that central bank independence could be jeopardized by higher levels of unconventional policy action? In a world of high levels of debt and overly expansionary fiscal policy, Fed tightening would become a lightning rod for criticism. At that point, the Fed could easily lose its independence as fiscal authorities came under attack. Thus, the Fed can't be an omnipotent actor because it would create massive possibilities for moral hazard on part of the fiscal authorities. This seems to be another interesting avenue for fragility in NGDP targeting. Central bank robustness leads to governmental fragility.