Re: Greenspan squawks on trade

[Jurriaan Bendien <bendien@xxxxxxxxxxxx>]

Thanks Ian,

That's a brilliant exercise in tautology by Greenspan. But what does he
really mean when he says:

"Indeed, the example of the fifty states of the United States suggests that,
with full flexibility in the movement of labor and capital, adjustments to
cross-border imbalances can occur even without an exchange rate adjustment."
?

The answer seems to be given in note 6, namely that "if external assets fall
short of liabilities for some countries, net external liabilities will grow
until they can no longer be effectively serviced. Well short of that point,
market prices, interest rates, and exchange rates will slow, and then end,
the funding of liability growth."

A purer statement of faith in the ability of unfettered market forces to
establish equilibrium scarcely seems possible, and this faith does indeed
seem to be justified with reference to a globalised "ledger-concept" or
accounting concept of equilibrium, which I mentioned before on PEN-L, namely
"The buildup or reduction in financial claims among trading countries--that
is, capital flows--are hence exact mirrors of the current account balances.
And just as net trade and current accounts for the world as a whole
necessarily sum to zero, so do net capital flows. Because for any country
the change in net claims against all foreigners cumulates to its current
account balance (abstracting from valuation adjustments), that balance must
also equal the country's domestic saving less its domestic investment."

In which case there is nothing economists can actually do to optimise the
allocation of scarce resources, except ensure that all impediments,
restrictions and regulation on the operation of free market forces are
removed. This sounds a bit like the theorem that, since, in an economy based
exclusively on free trade, "every economic actor's gain is another economic
actor's loss", net world operating surplus, net debts and net capital flows
must equal zero at any point in time. Why don't they then ? If Greenspan is
correct, all economists can go home now, they've made their point, there is
nothing further to say or advice to give - it's all over to the accountants
now.

The interesting question that remains at the end of this amazing
intellectual "tour the force" is what actually happens in the real world
when liabilities can no longer be "effectively serviced" ? If holders of
liabilities can no longer make payments on liabilities, presumably they
would actually go bankrupt, lenders would suffer losses, and then the
price-level would be lowered, until bankrupted individuals could go into
business again ? Time seems an important variable here, but Greenspan
doesn't really discuss it. We remain at the end of the story musing the
paradox that while world net capital flows equal to zero, net stocks of
capital assets can increase. Isn't capitalism marvellous...

J.