Rogoff again on slowing global growth

For sometime now, this blog had been advocating here and here that it is necessary to slowdown global demand, so as to stave off the dark clouds encircling the global economy. Ken Rogoff has been the most prominent advocate of this school of thought.

Now Rogoff has reiterated his logic behind this reasoning. Except for Europe, all regions of the world have or are in the process of embracing some form of fiscal stimulus plan to pump-prime demand. He writes,

"Individual countries may see some short-term growth benefit to US-style macroeconomic stimulus, albeit at the expense of loosening inflation expectations and possibly paying a steep price to re-anchor them later on. But if all regions try expanding demand, even the short-term benefit will be minimal. Commodity constraints will limit the real output response globally, and most of the excess demand will spill over into higher inflation."

The whole debate ultimately boils down to which of the costs is higher - temporarily managing demand and thereby sustaining growth while re-anchoring higher inflationary expectations, against letting the excesses and distortions in the real economy and the financial markets be subjected to the process of "creative destruction" playing themselves out, thereby temporarily slowing down economic growth. I am inclined to believe that the later may be a more prudent choice, especially given the reasonably higher growth cushion available for many of the emerging economies. In fact, we should consider it a good fortune that the real economies in many emerging (and developed) countries are in good enough health, with bouyant aggregate demand growth, to take any demand slowdown in their stride.