Bank of Canada warns on US and Global fiscal imbalances

David Dodge, the Governor of the Bank of Canada (ie. Canada’s Alan Greenspan), yesterday made some very interesting statements on the effect current fiscal policy in the US and abroad will have on the worlds’ economy, including of course Canada, and what he feels needs to change in order for things to get back to a more reasonable situation.

The CBC has an overview here.

You can read Mr. Dodge’s speech here.

Some choice quotes:

… the management of large, global economic imbalances [has] become the subject of increasing concern among market participants and policy-makers around the world. I am referring, of course, to the persistent and growing current account deficit in the United States that is mirrored by large current account surpluses elsewhere, especially in Asia.

…. over the medium term, imbalances of this magnitude are not sustainable. At some point, they will have to be resolved. Why? For one thing, a country’s external indebtedness cannot keep growing indefinitely as a share of its GDP.

These imbalances will ultimately be resolved, either in an orderly, or in an abrupt, disorderly way.

… there are reasons to worry about imbalances in a global context. To begin with, market-based means of resolving international imbalances are somewhat less effective and potentially more disruptive. This is because there is less labour mobility across international borders, and so larger movements in relative wages and prices are needed in order for them to act as an equilibrating mechanism. Further, certain national and international policies, as well as interventions in the foreign exchange market [can you say China?], have been inhibiting the necessary relative wage and price movements. Indeed, some of these policies are making the situation worse. And so the concern is that the longer these imbalances remain unresolved, the greater the chances that the ultimate resolution will be disorderly. Equally troubling, there is a greater chance of protectionist measures that can seriously damage the global economy.

… all countries must pursue fiscal policies aimed at producing a sustainable public debt-to-GDP ratio. Where structural fiscal balance is absent, it should be achieved; where it is present, it should be maintained. There are some real problems on this front in the United States, in Europe, in Japan, and in some developing countries.

Read the rest, it’s not overly long, and worth the read.

The questions he raises are even more interesting given the ongoing post-Non turmoil in France and how that might affect it’s economic picture. Let’s hope for that “orderly adjustment”.