Dance of the bankers

Hal Varian compares the international financial system to a ballroom dance. (NY Times)

The international financial system is like a 19th-century ballroom dance. The central bankers lead with an interest rate adjustment. Their partners, the global investors, watch them closely, trying to anticipate their every move. In the background, the waiters carry their trays of imports and exports slowly back and forth, taking their cues from the pace set by the dancers in the center of the ballroom.

It's worth your time to read the whole article if you're new to the topic of global interest rates. Mostly, he summarizes what readers of the financial and macroeconomic blogs already know. He concludes...

The current interest rate increases are an attempt to slow the economy to avoid inflation. But over the next decade, we may be forced to raise interest rates simply to attract foreign lending to finance our budget deficit.

Such high rates would damp economic growth, putting more pressure on the Fed to return to the low-interest, easy-money policy we have seen in the past few years.

Such a policy runs the risk of stimulating inflation. The easy-money policies in the past few years have had a surprisingly small impact on wages, in part because of the threat of jobs moving to countries with lower labor costs. But if the dollar fell far enough, foreign labor would no longer be a bargain, giving domestic workers more leverage in wage negotiations.

In this chain of events, an inflationary spiral would become a real possibility, making the cost of a stumble on policy higher. Let us hope central bankers can keep dancing in step as they move interest rates back to normal levels.

These op-ed columns are a difficult way to educate the public on something with as many twists and turns as international finance. I enjoy Varian's writing, and wish he had more space to elaborate. But comparing central banking to ballroom dancing does get across a subtle point to the Times' readers. That point is that in a global economy, no central banker can do things entirely as he pleases without taking into account the other bankers.

UPDATE: Mark Thoma has some fun with Varian's piece.