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A little follow-up on Barry Eichengreen and Richard Baldwin (2008)

Editors noted:

The essays collected here speak directly to the finance ministers and leaders assembling in Washington, DC on the second weekend in October. They are designed to offer specific instructions about what those finance ministers and leaders should do to rescue our jobs and savings.

So, do the editors assume that Mr. Nakagawa, our finance minister,  can read this quickly in the air flight?  I'm afraid he cannot.  I hope he will speak up in the meeting, but I really hope he won't indulge himself extensively in preaching from Japanese experience.  I sincerely hope that he will speak very clearly and crisply.  I could imagine a very uneasy moment in the room.  Europeans clearly need international, that is, Asian and Middle East support.  World finance consists of Europe (trouble), US (trouble), Asia (sinking but still OK), and Middle East (still OK but must be nervous).

My hope is that our finance minister urges Europeans to unite under the comprehensive recapitalization plan, and commit to placing our precious foreign reserve, at the same time injecting more capital into IMF.

Does Switzerland adopt Euro or peg its currency to Euro?  Likely, if it need massive foreign support.  Fresh capital, I guess, must be domestic currency.  Foreign capital must be converted into domestic currency, putting pressure on fragile exchange rate market.  So, the government has to declare freezing exchange rate.  The case of Iceland is illustrative.  So, Euro zone will expand.  The seed of currency attack?  Well, you never know, there is some chance of self-fulling currency crisis.  But, I think currency crisis has a small chance because money supply is about to shrink.  Central bank will enlarge monetary base to prevent money supply from shrinking.  If money supply is stable, exchange rate will be OK fundamentally.  I have to think through theoretically.

What is repercussion BOP front?  IMF support will go to government account.  Government put it at first on its central bank's account.  Then, Government inject it to private capital in domestic currency.  So, the support money will sit as foreign reserve.

So, the table is set.  "Cheer up, Mr. Nakagawa!  Speak clearly and crisply!  Don't drink too much during air flight!"  Don't fail us.


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