I had written here last month about the necessity to slowdown economic growth and demand, especially in the merging economies, so as to ease the commodities' supply constraints facing the global economy. It was suggested that one of the ways to do this is to raise interest rates in these economies, through a co-ordinated action of the respective Central Banks. Besides cooling growth, it will also have the effect of containing inflationary pressures.
Now Ken Rogoff argues for a "co-ordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up". Rogoff finds fault with Governments, in both developed and emerging economies, for their fiscal demand management policies, that will only keep the boom going.
He writes, "Keynesian stimulus policies might help ease the pain a bit for individual countries acting in isolation. But if every country tries to stimulate consumption at the same time, it won’t work. A general rise in global demand will simply spill over into higher commodity prices, with little helpful effect on consumption."
The choice facing the world economy is not between sustaining high growth rates and containing inflation, but between a soft landing and a hard landing. It is time that we start applying brakes on the accelerating global economic train, so as to reduce its speed considerably and achieve a soft landing.