Re: Peter Garber, trade deficits, & bubbles

[Eugene Coyle <eugenecoyle@xxxxxxx>]

This is a great relief.  I thought the whole system was going to
collapse.  We are lucky to have serious economists looking into these
questions.

Gene Coyle

michael perelman wrote:

> A few weeks ago we discussed Peter Garber & tulipmania.  Now he shows
> that the current account deficit can go on for ever????
>
> "The US Current Account Deficit and Economic Development:
> Collateral for a Total Return Swap"
>
>      BY:  MICHAEL P. DOOLEY
>              University of California at Santa Cruz
>              National Bureau of Economic Research (NBER)
>           DAVID FOLKERTS-LANDAU
>              Deutsche Bank, London
>              National Bureau of Economic Research (NBER)
>           PETER M. GARBER
>              Brown University
>              Department of Economics
>              National Bureau of Economic Research (NBER)
>
> Document:  Available from the SSRN Electronic Paper Collection:
>           http://papers.ssrn.com/paper.taf?abstract_id=586645
>
> Paper ID:  NBER Working Paper No. W10727
>    Date:  September 2004
>
> Contact:  MICHAEL P. DOOLEY
>   Email:  Mailto:mpd@xxxxxxxx
>  Postal:  University of California at Santa Cruz
>           Santa Cruz, CA 95064  UNITED STATES
>   Phone:  510-459-3662
>     Fax:  510-459-5900
> Co-Auth:  DAVID FOLKERTS-LANDAU
>   Email:  Mailto:david.folkerts-landau@xxxxxx
>  Postal:  Deutsche Bank, London
>           Winchester House
>           Great Winchester Street, 1
>           London EC2N 2DB,    UNITED KINGDOM
> Co-Auth:  PETER M. GARBER
>   Email:  Mailto:PETER_GARBER@xxxxxxxxx
>  Postal:  Brown University
>           Department of Economics
>           64 Waterman Street
>           Providence, RI 02912  UNITED STATES
>
> ABSTRACT:
> We argue that a chronic US current account deficit is an
> integral and sustainable feature of a successful international
> monetary system. The US deficit supplies international
> collateral to the periphery. International collateral in turn
> supports two-way trade in financial assets that liberates
> capital formation in poor countries from inefficient domestic
> financial markets. The implicit international contract is
> analogous to a total return swap in domestic financial markets.
> Using market-determined collateral arrangements from these
> transactions we compute the collateral requirements consistent
> with recent foreign direct investment in China. The data are
> remarkably consistent with such calculations. The analysis helps
> explain why net capital flows from poor to rich countries and
> recent evidence that net outflows of capital are associated with
> relatively high growth rates in emerging markets. It also
> clarifies the role of the reserve currency in the system.
>
> --
>
> Michael Perelman
> Economics Department
> California State University
> michael at ecst.csuchico.edu
> Chico, CA 95929
> 530-898-5321
> fax 530-898-5901