A scary Fantasy Island

Sir, Samuel Brittan as “An economist on Fantasy Island” May 10 scratches his head and just wonders. In a world where the IMF, in their Global Financial Stability Report, April 2007, could say something as surrealistic as “The persistence of global imbalances brings with it an important financial stability issue—the problem of sustaining the financial flows needed to support the imbalances” and get aways with it, he is certainly not alone. Sir Samuel Brittan then makes what in a financial world could be called a straddle by on the one hand preaching the advice of a-when-in-doubt-be-careful, coming out in favor of tighter money, while simultaneously reminding us of the “paradox of thrift” where an “excess of savings can promote a slump”. Let me feed the conundrum.

The world has been painting itself into a corner where if it wants to solve disequilibrium while keeping up growth, China is now its consumer of last resort. There is nothing wrong with that, except for: first we are not really certain about what could happen when China tries to cash in on their international chips to pay for their consumption, and second, given that the consumption demands of China could differ a lot from the current, whether we have sufficient environmental space so as not to burn up in a global oven, or the sufficient commodities so as not have all fizzle away in another bubble. Some Fantasy Islands are indeed great; others are just a little bit too scary.