Sunday, January 24, 2016

How Will China Finesse the Trilemma?

There’s an old joke about operations management and engineering: cheap, fast, and good … pick two. The joke is that bad managers try to get all three, and frequently end up with none of them.

There’s an international macroeconomic version of that pundits took to calling “the trilemma” a few years back.

It says that a country can’t have all three of the following things at once: a flexible monetary policy, free flows of capital, and a fixed exchange rate.

The situation that China is in right now is that they have officially given up on the fixed exchange rate, but haven’t been too willing to let it float freely either. And they’re worried about capital outflows. And they’re using their monetary policy tools to try and control both.

This has been tried before. Heck, it gets tried by several countries every year. It usually doesn’t turn out well.

Do note that the article makes clear that capital outflows are not necessarily a bad thing. That’s basic economics, but personally, I’d like to give world leaders a quiz on that one … my guess is that most of them would get it wrong.

Read the article entitled “China’s Capital Flight” in the January 14 issue of Bloomberg BusinessWeek.

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