The Foreign Service Journal, February 2011

F E B R U A R Y 2 0 1 1 / F O R E I G N S E R V I C E J O U R N A L 43 and how much are the questions. When governments run up large fiscal deficits in relation to gross domestic product, they usually do so in an attempt to stimulate the economy as it slides into recession and the automatic stabilizers of so- cial safety nets can no longer pro- tect its citizens. But once the recovery begins, governments need to consolidate and trim these stim- ulative measures to control the growth in government debt. Fiscal consolidation is econ-speak for cutting back the stimulus. An exit strategy is a plan for when, exactly, to do this retrenchment, how rapidly to carry it out, and in what magnitude. It has been a topic of considerable de- bate in international policy circles for several years now. 9. Whether cyclically or structurally unemployed, you are still out of a job. Cyclical unemployment is a term for job loss that is tied to the frequent shifts in the busi- ness cycle that periodically reduce aggregate demand in the economy. In this situation, the number of unem- ployed workers exceeds the number of job vacancies, so that even if full employment is attained and all open jobs are filled, some workers would still remain unemployed. Structural unemployment occurs when a labor mar- ket is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the un- employed workers and the skills needed for the available jobs. It lasts longer, and simple demand-side stimulus will not readily abolish it. Structural unemployment may also rise due to per- sistent cyclical unemployment: if an economy suffers from low aggregate demand that is long-lasting, many of the unemployed become disheartened, their skills (in- cluding job-searching ability) become “rusty” and obso- lete, and they may not fit the vacancies that are created when the economy recovers. Persistence in structural unemployment is commonly referred to as “hysteresis.” 10. Quantitative easing is, simply, printing money. When a central bank enters financial markets to buy gov- ernment and private financial instruments, it must pay for these purchases with credit or checks drawn on its own balance sheet. Some refer to this as printing money; while the government printing presses may not physically produce currency, the money supply — defined as cash plus credit plus demand deposits — is still increased. The QE policy has now temporarily reversed the sig- nificant change in monetary policy operations that occurred in 1979, when the Fed decided to stop at- tempting to target the money sup- ply and instead adjust its price, the key interest rates. The Fed and other major central banks turned to quantitative easing to address current economic conditions, where recovery from the global financial crisis is weaker than expected or needed. Because interest rates — the major mone- tary policy tool — are at or near zero and fiscal policy is tapped out (at least from a political standpoint), QE is the only option left. Still, critics are concerned that, es- pecially with some purchases of private financial instru- ments of questionable value, the quality of the central bank’s balance sheet will diminish, and faith in the coun- try’s currency will plummet. 11. QE introduces a Hegelian dialectic with no syn- thesis. In present-day economics, commentators de- scribe the tension building between the U.S. Federal Reserve’s apparent intent to engage in further quantita- tive easing and the intent of the Chinese central bank (and others) to resist appreciation to stay competitive with the dollar in Hegelian terms. The Fed has one “the- sis” of how monetary policy should proceed; China and other governments stand by the “antithesis” of maintain- ing their currency values (while faced with the Trilemma — see Wonkism #2). The trouble is that instead of a “synthesis” — which can’t really happen in this case un- less one thesis overpowers the other — the result tends to be stalemate, if not conflict. 12. Deflation is dangerous to the health of the U.S. and global economies. Deflation describes an economy whose growth is so depressed that the drawdown in ag- gregate demand actually decreases prices and asset val- ues, prompting businesses to drop prices further in a desperate attempt to get people to buy their products. This may initially seem like a great thing for consumers, except that the cause of deflation is a long-term drop in demand, which means that a recession is already under way — with job losses, declining wages, and an ongoing decline in the value of homes and stock portfolios. Like inflation, deflation is very difficult to combat F O C U S Global rebalancing is diplo- speak for complaints about the adverse effects of spending habits by one country on another.