Re: Peter Garber, trade deficits, & bubbles

[Daniel Davies <dsquared@xxxxxxxxxxxxxxxx>]

I agree that there's a lot of institutional detail missing and that a huge
amount depends on what model you have of monetary policy and the exchange
rate regime.  But the idea would be that since the Chinese bought that
treasury bond, then someone else who had $2 to invest is going to have to
buy something else; probably a bank deposit or some such.  I agree that this
model is a bit woolly and dependent on assuming things to be exogenous which
aren't, but the general principle is the one of "capital account
fungibility", which is one of the big tenets of sovereign credit rating
agencies (NB: Folkerts-Landau's background is at the IMF; his current job at
Deutsche Bank is in writing research about the credit risk on emerging
market bonds like those Venezuelan ones I tipped not so long ago).  The idea
is that _any_ lending to _any_ entity within a country is effectively
lending to the _whole_ economy, because it loosens the external balance
constraint.  This is the motivating idea behind the "sovereign credit
ceiling", or the principle that no entity in a country can have a credit
rating better than the local sovereign.  I think it's what F-L and gang are
appealing to here.

dd

-----Original Message-----
From: PEN-L list [mailto:PEN-L@xxxxxxxxxxxxxxxx]On Behalf Of Michael
Perelman
Sent: 21 September 2004 21:39
To: PEN-L@xxxxxxxxxxxxxxxx
Subject: Re: Peter Garber, trade deficits, & bubbles


I am not sure I can follow Daniel's argument.  I buy a pair of Chinese socks
at
Wal-Mart.  The profits go to the shareholders, who may invest abroad.
The Chinese government buys a $2 Treasury bond from the U.S. with the
proceeds from
the sock factory.

It seems to me that there is an extra degree of separation from the case
where a bank
gathers up funds & lends them to a firm.

Am I missing something?
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael at ecst.csuchico.edu