The Foreign Service Journal, February 2011

caused by the trade-offs above con- tinue to worsen, however, there is a potential risk that policymakers could become aggressive and retal- iatory enough to engage in yet an- other option, a currency war. That possibility prompted one commen- tator to rename the Trilemma a “Quadlemma.” 3. What/who exactly needs a dose of global rebalancing ? In a global context, countries with large and persistent current ac- count surpluses and high domestic savings rates should undertake policies that rely less on foreign demand as a driver of their economic growth and more on ways to en- courage domestic spending as a source of growth. Con- versely, countries with large and persistent current account deficits need to focus on decreasing consumer spending overall, and encourage domestic savings to sup- port investment and, hence, long-term growth. Thus, global rebalancing is diplo-speak for complaints about the adverse effects of spending habits by one country on an- other country. 4. The Triffin Dilemma is a conflict many would wish to have. This term refers to the fundamental conflict between short-term domestic and long-term interna- tional economic objectives faced by a country whose na- tional currency also serves as an international reserve currency (as the U.S. dollar does today). Such a dual role leads to a tension between national monetary policy and global monetary policy. The country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency to fulfill world demand for foreign exchange. This is reflected in fundamental im- balances in the balance of payments, specifically the cur- rent account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars into the United States. While there are certainly drawbacks to reserve cur- rency status, many countries would not mind all that much being able to run persistent current account deficits while other countries purchase their assets be- cause they want the reserve currency. 5. Negative growth is an oxymoron only economists could love. Economists are fond of describing economic events in terms of growth rates, noting which growth rate is larger (and hence better) than an- other, and determining what eco- nomic part of the aggregate con- tributed most to the overall growth rate. If the period-to-period change is negative, economists refer to that as negative growth because that’s how they store the numbers in their computers. This term tends to drive editors and the literati at large crazy, for reasons that escape economists (who are, by contrast, generally counted among the “nu- merati” —masters at math but not so good at writing). 6. An optimum currency area is rarely optimum. As the euro area countries are discovering, adherence to common monetary and fiscal policies is required for a single currency regime to exist. If these policies have ill effects on one part of the proscribed currency area, or if policy discipline is ignored (flouted) or not enforced in some places, then one of the key equilibrating mecha- nisms that might help an afflicted area recover, namely currency depreciation, is missing. Many have forgotten episodes in relatively recent U.S. economic history — the near collapse of the aerospace industry in the Northwest in the 1970s or the plunge in oil prices in the early 1980s that depressed the South- west, to name just two — when economic policy was being set in Washington for all 50 states, even though some had healthy economies while others were de- pressed. 7. Moral hazard applies only if you’re not allowed to sink. This phenomenon occurs when a party insulated from risk behaves differently than it would if it were fully exposed to the risk. It arises when an individual or insti- tution does not accept the full consequences of its ac- tions, and therefore has a tendency to act less carefully than it otherwise would. Many worry that one likely outcome of policy meas- ures taken during the global financial crisis, during which many financial institutions and manufacturing companies were kept afloat by government bailouts, would be that financial and business CEOs would take extraordinary risks in their future deals in the belief that the govern- ment would bail them out. Some financial institutions were not bailed out during the financial crisis, however, and didn’t have to worry about moral hazard. 8. Fiscal consolidation as an exit strategy : when 42 F O R E I G N S E R V I C E J O U R N A L / F E B R U A R Y 2 0 1 1 F O C U S Moral hazard occurs when a party insulated from risk behaves differently than it would if it were fully exposed to the risk.