29 March 2007
A Global Income Model
In their OpEd in the March 24-25 Wall Street Journal, Messrs. El-Erian and Spence perceptively describe only half of the equilibrium that has driven world economic growth over the last thirty years. Western imports of commodity-like consumer and industrial manufactures, largely from East Asia, have created trade surpluses for those suppliers. The credit that feeds that consumption has offered those suppliers an investment opportunity in which to hold the liquidity generated by those surpluses.
The reason that this system has not collapsed is that the balance of trade has been transformed into an exchange of information products for physical products. The real estate boom, fanned by the sub prime lending frenzy, has given impetus to world trade. But the underlying momentum of the global economy is more a function of communication technology’s obliteration of national barriers to the flow of capital and other economic factors. Ultimately, money managers in the export-driven societies of the East indulge the appetites of consumers in the industrial societies of the West because their employment in the information economy makes them creditworthy.
Until now, this global income model has operated without guidance from a monetary authority protecting it from the “policy mistakes” that Messrs El-Erian and Spence warn could jeopardize it. Until now, the IMF has played a narrow, if widely resented, role in modulating international imbalances of payments. Perhaps we will need a central manager of incomes around the world in the future to assure continued smooth transfers of visible for invisible goods and smooth exchanges of payments for investment and production.
In their OpEd in the March 24-25 Wall Street Journal, Messrs. El-Erian and Spence perceptively describe only half of the equilibrium that has driven world economic growth over the last thirty years. Western imports of commodity-like consumer and industrial manufactures, largely from East Asia, have created trade surpluses for those suppliers. The credit that feeds that consumption has offered those suppliers an investment opportunity in which to hold the liquidity generated by those surpluses.
The reason that this system has not collapsed is that the balance of trade has been transformed into an exchange of information products for physical products. The real estate boom, fanned by the sub prime lending frenzy, has given impetus to world trade. But the underlying momentum of the global economy is more a function of communication technology’s obliteration of national barriers to the flow of capital and other economic factors. Ultimately, money managers in the export-driven societies of the East indulge the appetites of consumers in the industrial societies of the West because their employment in the information economy makes them creditworthy.
Until now, this global income model has operated without guidance from a monetary authority protecting it from the “policy mistakes” that Messrs El-Erian and Spence warn could jeopardize it. Until now, the IMF has played a narrow, if widely resented, role in modulating international imbalances of payments. Perhaps we will need a central manager of incomes around the world in the future to assure continued smooth transfers of visible for invisible goods and smooth exchanges of payments for investment and production.
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