Central banks are pushing on a string. If they insist on more monetary stimulus, the world could head toward an inflation crisis with similarities to what happened in the 1970s. Thus, central bankers may be making fools of themselves while trying to restore growth to everyone’s satisfaction. But globalization is making demand manipulation less effective than in the past, as multinational corporations have made production completely movable. Hence, no government can count on a localized, the kind of virtuous cycle that balances supply and demand and is necessary for demand stimulus to work.

The rise of the true multinational corporation has been the most important economic development since 1990. These are independent forces, and many are stronger than most countries. Any policymaker or economist who doesn’t understand the work of today’s multinationals is not qualified for the job. …………………….

………………… That is the best scenario for Europe without structural reforms. Now, it appears Europeans don’t want reform and won’t accept a lower standard of living. They have politicians who want to spend their way out of problems, backed by famous American economists. We will see the consequences soon.

The above are verbatim quotes from Andy Xie’s piece for the Caixin magazine published on 7th May. It is well worth a read.

Hunkering down, accepting lower growth and lower standard of living (for a while) while working to remove the (natural and energy) resource constraints on growth that have become more and more binding in recent years, limiting govenrment support to the very needy, etc., are the possible ways to deal with the mountain of debt and living beyond means that have characterised the last three decades.

We have basically stolen growth from the future. We need to pay back, at least for a while. Failure to acknowledge that will bring us greater grief. We are on our way there.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.