Re: [OPE-L] Trade Deficit Disorder

[Alejandro Valle Baeza <valle@xxxxxxxxxxxxxxxx>]

Rakesh Bhandari wrote:

On Fri, 17 Mar 2006 13:32:26 -0600
 Alejandro Valle Baeza <valle@xxxxxxxxxxxxxxxx> wrote:

Dear Rakesh,  do you agree with WSJ that US current account deficit is
not a big problem for US economy? Such deficit is about 6% of GDP. Do
you think it is unsustainable everywhere but is not a problem in US?

best wishes
Alejandro

The CAD may be a bigger problem for US's creditors than it is
for the US!  As Susan Strange long ago pointed out in Mad Money
(1998): the US can use "its bargaining power as military protector, or as
interventionist meddler, or as major trading partner to get its own way and to
make others undergo the painful adjustments."
At any rate, differential returns does seem to be one
important factor in why the unsustainable has been sustainable
longer than most Marxists would have thought.
For years I have been suggesting that we probe why the apparently
unsustainable has proven sustainable in what must now be considered
not the short but medium term.

Yours, Rakesh

Rakesh, I reply to you with this quote:


"How Scary Is the Deficit?
By Brad Setser et al.

From Foreign Affairs, July/August 2005

---

Our Money, Our Debt, Our Problem

Brad Setser and Nouriel Roubini

The U.S. current account deficit -- the gap between what the United States earns abroad and what it spends abroad in a year -- is on track to reach seven percent of GDP in 2005. That figure is unprecedented for a major economy. Yet modern-day Panglosses tell us not to worry: the world's greatest power, they say, can also be the world's greatest debtor. According to David Levey and Stuart Brown ("The Overstretch Myth," March/April 2005), "the risk to U.S. financial stability posed by large foreign liabilities has been exaggerated." Indeed, they write, "the world's appetite for U.S. assets bolsters U.S. predominance rather than undermines it."

But in fact, the economic and financial risks that arise from the U.S. current account deficit (and the resulting dependence on foreign financing) have not been exaggerated. If anything, they have received too little attention -- and are set to grow in the coming years.

Levey and Brown make three basic arguments. First, they claim that foreign central banks will probably continue to finance U.S. deficits. Second, they predict that even if foreign central banks do pull back at some point, private investors will step in. And finally, they assume that even if this financing does not materialize, a dollar crash would hurt Europe and Japan more than it would hurt the United States. Unfortunately, there is a good chance that all of these assumptions will prove false. Foreign central banks may well stop financing growing U.S. deficits, private equity investors might not take their place, and the resulting adjustment process would prove quite painful for the United States."

Muchos saludos

Alejandro

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