How developing countries can save the bankrupt West

In the circle of hell that is contemporary publishing, one genre offers relief: the quick study of the ongoing financial meltdown. There seem to be no end of books rumbling off the production line either lambasting the greed and stupidity of the era just passed or offering handrails along our descent into depression.

And then there is Martin Wolf, the Financial Times chief economics commentator, who surveys the global economy from Blackfriars Bridge with a preternatural sobriety.

Where the rest of us just see water pouring in from all sides, he sees the flaws in the plumbing. And in his latest book, Fixing Global Finance (Yale UP, £18.99) he does not quite offer solutions, but does at least apply a cold towel to the markets' fevered brow.

Wolf's big idea is that emerging economies need to stop buying American assets, notably US Treasury bonds, and start investing in their own countries. The conservatism which drove them to buy American was understandable. They were sick of currency crises, like the ones which afflicted Asia and Russia in the late 1990s and Argentina in the early 2000s. So they began saving most of their money and buying the safest assets they could find, namely those denominated in dollars and preferably backed by the US government.

The Americans did their part by issuing ever more bonds, which in turn allowed the American consumer to borrow and buy more.

What is refreshing about Wolf's analysis is that it gets us away from discussions of morality and greed, which are inadequate to the problems we now face. The American and British consumer did not spend because he suddenly became insanely greedy and financially irrational. He spent because he could, and because macro-economic trends encouraged, even required him to. We bought holiday homes and maxed out the credit cards so that emerging economies could stabilise their finances. Mission accomplished.

Now it’s emerging economies’ turn to return the favour the West did them

But then came the reckoning. Developed countries' economies teeter on the edge of bankruptcy, banks are effectively nationalised, Keynesianism is back. But Keynesianism is a quick fix: for a longer term fix, I'm with Wolf.

Now it's the emerging economies' turn to return the favour the West did them. China especially. If they don't, the United States has a powerful bazooka at its disposal: the devaluation of its currency. This would make all of its debt cheaper to repay and drive up the dollar value of its foreign-currency denominated assets, thereby enabling it to erase its deficit with the world almost at a stroke.

Any sudden moves, however, threaten disaster. Far preferable is a gradual unwinding. Countries now throwing their savings at the United States should begin investing in their own countries. China's investment opportunities alone seem endless: cleaning up its environment, relieving rural property, ending the savage one child policy and developing its domestic markets. Anything but buying yet more US T-bills.
 
America is helping the unwinding along by plunging into recession and making itself considerably less attractive to investors. Now all those Asian and Latin American countries, notably Brazil, which have been leaning on the United States these past few years, need to use their savings to turn themselves into thriving domestic markets, not merely low-cost export engines. Thus, the world's economy can rebalance and we will see proper financial globalisation in which America is relieved of its role as the market and lender of first, middle and last resort.
 
It's a lovely idea. But is it workable? Reading any economic commentator, Wolf included, is an inevitably unsatisfying experience as the task of summarising the forces which shape our economic lives is simply beyond the human mind. The whole is never quite visible.

To bring about what Wolf proposes will require nerve and counter-intuition from those countries with heaps of surplus savings to spend rather than hoard to get through this financial winter.

But the Americans, and to an extent the British, did their part by piling up loans for these countries to acquire as secure assets. To complete this financial triple Axel, it's over to you, Beijing. ·