The clarity, poise and judgement of Martin Wolf’s FT commentary is a compensating pleasure of crisis. Fixing Global Finance, completed just after the Northern Rock debacle, offers not just a fascinating account of the global economy teetering on the abyss – it also marks the first moments of this ‘good liberal’ questioning his own beliefs, which had been so clearly laid out in Wolf’s earlier Why Globalisation Works, published in 2004.
Wolf’s ‘savings glut’ account of the build-up to crisis is that the huge excess of production over consumption in East Asia and the energy-rich Gulf since 1997/8, and especially during 2002 to 2007, required an offsetting by consumption over production elsewhere. Between 2002 and 2007, this mostly came from US households who binged on mortgages against the apparently rising value of their houses. We, unlike Wolf at the time of writing, now know the tragic next act.
The exact logic of this process makes up much of Wolf’s analysis. East Asian nations were traumatised by the crises of 1997/8 when they suffered a sudden flight of foreign capital: sharp recessions, dramatically reduced domestic consumption and increased taxes. Wolf sympathises with the countries which, in order to avoid such massive social disruption, protected themselves by accumulating dollar reserves. China learned from its neighbours and has done the same. Hence they fixed cheap currencies, enforced cross-border capital controls and ‘sterilised’ trade surpluses – making sure that the dollars earned by exporters would mostly return to the US as investments in government debt. Against this, Wolf hopes for a time when each country is sufficiently trusted to borrow in its own currency and therefore will not suffer the mood swings of fickle global money flows.
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