A Timed Stimulus

Fan Gang for Project Syndicate said:

"No doubt, government macroeconomic management that is too strong may delay necessary market-oriented reforms. But the financial crisis has shown that a twenty-first-century market economy requires government participation to function. For a developing economy like China, it is better to have a government that plays an active role in avoiding the ups and downs that the Western economies experienced in their early days – and are still experiencing today."

Current financial crisis stylized facts (Export-Led vs. Dollar Crisis)

These stylized facts follow Kenneth Rogoff’s article

1. Global Imbalances – euphemism for the huge US trade deficit and the corresponding trade surpluses elsewhere, not least China (70% of the excess funds saved by China, Japan, Germany, Russia and Saudi Arabia).

2. Cheap money from abroad juiced an already fragile financial regulatory and supervisory structure that needed discipline more than cash.

3. America’s current-account deficit has now shrunk to just 3% of its annual income, compared to nearly 7% a few years ago.

4. Reinhart & Rogoff find that if financial crises hold one lesson, it is that their aftereffects have a very long tail.

5. Any real change in the near term must come from China [This economy] needs to strengthen its social safety net and to deepen domestic capital markets before consumption take off - consumption represents 35% of national income.

Source: Project-Syndicate.org