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A heavily undervalued renminbi is the key financial distortion in the world economy today.
For an example of how a post-crash crutch becomes a permanent financial distortion, look no further.Federal support for mortgages started as part of the New Deal, in 1934.
Additionally, on the ground of the stakeholder's behavior, irrational optimistic or pessimistic vision (Akerlof and Shiller 2010), market imperfections because of asymmetries in information (Stiglitz 2010) and rent seeking (Johnson and Kwak 2011) cause financial distortion and pave the way to global current account imbalance.
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To get its citizens to spend more, the government must go beyond undoing the financial distortions — like artificially depressed interest rates that encourage huge savings.
And it should remove the financial distortions — like artificially low interest rates — that encourage ordinary Chinese to save too much and spend too little.
David Kern, chief economist at the British Chambers of Commerce, said: "We believe this would be misguided, as more QE would provide only marginal benefits for the real economy, while heightening risks of financial distortions, bubbles and higher inflation".
Borrowing made cheap by financial distortions is not a good thing, and LIBOR may have contributed to this.A firmer foundationThe BBA is consulting with banks and regulators on LIBOR reform.
That will gradually help improve the public finances, which are in a mess; gradually help reduce the financial distortions that have arisen from the state's role in banking; and gradually help reform politics, which had become dependent on state cash and power.Gradually: that could be Japan's watchword.
"We believe that further QE would provide only marginal benefits for the real economy, while heightening longer-term risks of financial distortions, bubbles and higher inflation".
The paternalistic welfare state is viewed as more humane, despite the loss of freedom and the financial distortions associated with it.
In an effort to lessen the effects of (inevitable) economic downturns, the Fed (and other central banks) has caused extreme financial distortions and dislocations.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com