Tuesday, June 08, 2010

SocGen Sees Needs For Rebalancing

The economists at Societe Generale are out with their flagship "Global Themes" report "Tri-policy - Getting the mix right" today, and see the need for rebalancing (just as a reminder), though that may be not that easy as to write down the "wish-list":

The US needs to de-leverage in the household and financial sectors. Cheap credit may be needed immediately due to economic threats, but ultimately credit must be fairly priced. Higher rates are needed for credit rationing and to encourage savings. We look for higher term premiums on US Treasuries as China purchases fewer securities. At the same time, banks need to reduce risk and hold safer products with appropriate returns.

European governments need to reduce their spending and revamp their safety nets. Social spending plans throughout Europe are too expensive. Policymakers resisted the free-market ways and avoided some of the pitfalls that befell the US (UK, Iceland and Ireland), but a new balance now needs to be struck to secure future economic growth. Most importantly, European policymakers need to put the E in EMU. The current system of a single currency and single monetary policy without an efficient fiscal policy framework is clearly not sustainable.

In Asia, the use of under-valued currencies and export growth cannot be a lasting source of economic growth. China and many other Asian countries hold large intrinsic wealth that is not captured in their currencies and capital market systems. The economies are too large to continue growing their surpluses. These countries need to appreciate their currencies and foster domestic consumption. The world has tremendous productive capacity. There is a scarcity of viable consumption. To avoid inflation, particularly of consumer food products, a currency appreciation would provide households with significant purchasing power to boost demand for cheap agricultural products.

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