Re: [OPE-L] Trade Deficit Disorder

[Jerry Levy <Gerald_A_Levy@xxxxxxx>]

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

via Alejandro:

>>>>>>>>>>>>>>>>>>

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."

>>>>>>>>>>>>>>>

 

Additionally,  central banks now have the option of switching

away from  the Dollar to the Euro.  The threat of exchanging Dollars

for Euros gives debt holders some additional leverage that they didn't

have before. 

 

The problem, though, for those central banks  is that if direct foreign

investment in the US recedes and the US economy crashes so might

their own economies.  While private investors will be concerned with

ensuring private gain, the central banks in other nations won't want to

damage their own  macroeconomies.  The irony then for many of

those central banks may be that what's good for investors from their

nations may be bad for the US economy which may then be bad for

their own economies.  So long as a nation's economy is heavily

dependent on trade with the US it may be a case of "you can't win

for losing."

 

Alejandro -- for how many consecutive years have you expected the

US economy to crash?  Why hasn't it?

 

In solidarity, Jerry