As in the 1930s, complaints about “beggar-thy-neighbour” trade and exchange rate policies pollute the global atmosphere: eurozone member countries complain about the falling British pound; Americans complain about China's “manipulation” of the renminbi; deficit countries complain about excess supply in surplus countries; and surplus countries complain about protectionism in deficit countries.
So who is right? Everybody and nobody. We are hearing the results of a mutually destructive struggle over slices of the dwindling global demand cake. That way lies competitive devaluations and trade wars. The solution is to expand demand, but with surplus countries doing more than the deficit countries.
In the fourth quarter of 2008, nominal gross domestic product shrank at an annualised rate of 4 per cent in the UK, 4.2 per cent in the eurozone, 4.6 per cent in Germany, 5.8 per cent in the US and 6.4 per cent in Japan. This, then, is a world of grossly deficient demand.