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I'm reading an advance copy of Martin Wolf's Fixing Global Finance. Where most books suffer from being written during their moment of relevance and then being published after that instant has passed, this book was largely written before the events people will expect it to address but will be published at exactly the right moment. And the book will be relevant, if only for Wolf's genuine prescience on these questions. This, for instance, is scary:
Happily, as late as fall 2007, no sizable emerging market crises had occurred after 2001 (when Argentina defaulted, while the last global wave of crises to affect emerging economies occurred between 1997 and early 1999. This may suggest that the world economy has attained stability. That would be a premature judgment.Since emerging market economies are unable or unwilling to absorb surplus savings generated in the world economy, and, on the contrary, are generating surplus savings themselves some high-income country must absorb those funds. Thus, the net flows of capital were from the rest of the world to a few creditworthy high-income countries, above all, the United States, which has become the superpower of global borrowing...but even there the domestic counterpart of the external borrowing generated what ultimately proved to be unsustainable increases in household indebtedness. These led to the subprime" crisis -- a wider crisis that had its roots in US mortgage lending practices -- and to a financial shock that began to ripple across the high-income countries in 2007.To Wolf, we've entered into an uneasy global equilibrium where the US's appetite for borrowed money is the linchpin of international economic stability. We're a global bank of sorts, the single place where the globe's emerging markets feel comfortable investing their surpluses. If our position changes, the effects will be huge -- and not just on the emerging markets. We owe a lot of money right now, and just like with the big banks on Wall Street, if we need to pay it back over time, that's not so bad. If we need to pay it back quite quickly, well, that could be very bad indeed.