Sunday, August 10, 2008

Why I back Larry Summers

They say a miracle is not the suspension of natural law, but the operation of a higher law. As I notice the dollar hitting a five-month high of $1.5055 against the Euro and climb 1.3 per cent to $1.9189 against the GBP (even as oil prices decline to $115 a barrel levels), I know I am witnessing miracle. Yes, I can vouch for that.

The violence of the move was testimony to the extent to which the market had been surprised by economic weakness outside the US. UK economic data has shown increasing weakness this week; officials in Japan have warned that their economy was headed for a recession; and the Reserve Bank of Australia said it was planning to cut interest rates to ward off an impending economic slowdown. And we in India were hiking rates to rein in inflation!

So there it goes. The world economy is a mixed bag with no uniform outlook – supply shocks, financial dislocations and concern about rising inflation – are present at once. The future is as uncertain as ever to all and there lies my optimism. No one knows what to do next. Everyone could be right or nobody is. Ain’t that queer enough? I think so.

That’s why I back Larry Summers views in FT. Excerpts –

“Perhaps unsurprisingly in the face of so many adverse surprises, the policy debate has become cacophonous. Some emphasise the necessity of the painful adjustments under way, while others urge their mitigation. Some focus on product price inflation, others on asset price deflation as the principal problem. Some focus on assuring that imprudent lending by financial institutions is discouraged, others on assuring that financing for investment by households and businesses remains available. Some focus on slowing market adjustments to prevent panic, others on the need for rapid adjustment of prices to true fundamental levels, even if this is painful in the short run.”
Imagine the plight of the huge bets against a strong dollar? The street’s gonna’ be littered with blood for sure.


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