Rebutted by Martin Wolf:
Enjoy the coming slump. That is not what the Bank for International Settlements says to the US and other overindebted economies. But it is what its latest annual report implies.... Persisting with monetary and fiscal accommodation is uncomfortable. But unconventional times demand unconventional policies. What makes these times unconventional? The answer is that a number of economies are in... a period of sustained private sector deleveraging.... [T]he BIS report... argues for monetary and fiscal tightening across the globe....
Suppose we had an inflation-targeting central bank for the world. How should it respond to rising commodity prices when inflation expectations are also under control?... [W]ould it also wish to reduce nominal wage rises, to offset the inflationary impact of the rise in commodity prices, even if that risked a significant slowdown? I think not....
Now turn to the yet more debated question of fiscal policy. The question I have is this: does the BIS know that every sector cannot run financial surpluses at the same time? Few doubt there is excessive private sector debt in a number of high-income countries. But how is it to be reduced?... [E]very sector, other than the government, is seeking to strengthen its balance sheet at the same time. The BIS insists this is not good enough: highly leveraged countries are running structural fiscal deficits, which must be eliminated as soon as possible. Fair enough, but where are the offsetting adjustments to occur?...
If you believe a sharp monetary and fiscal tightening would result in an investment boom, I have a bridge to sell you.... This process of thinking through offsets to a sharp fiscal tightening is inescapable.... [I]t is impossible to eliminate structural fiscal deficits until either the private sector structural adjustment is complete or we see big shifts in the external balances.... The BIS boldly calls for simultaneous private and public deleveraging. But what are to be the offsets? That is the question. The BIS provides no convincing answer.
Rebuttals to talking-points misinformation that I want to have at the forefront of my brain--for when I am surprised, as I will be, by an unexpected question from an unexpected direction while talking to reporters, phone callers, passers-by, radio interviewers, cable TV interviewers, etc....
