Re: piece by P. Davidson

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

In his Guardian piece, Paul Davidson writes:

All prudent nations (except the United States) desire a surplus of exports
over imports to obtain a net positive financial savings position on their
internationally earned income. This surplus is added to the nation's foreign
reserves. Since the global economy is on a dollar standard, additions to a
nation's foreign reserves are held primarily in the form of US treasuries.

The effect of all nations attempting to accumulate foreign reserves is to
create persistent high rates of unemployment, and liquidity problems for the
global economy - and this is true whether the global economy is on either a
fixed or a flexible exchange rate system. In essence, when any nation runs
persistent export surpluses to accumulate foreign reserves, it is playing a
game of Old Maid and passing the Black Queen of unemployment and
indebtedness to its trading partners.

Comment:

The Old Maid/Black Queen argument is predicated on the proposition which
Greenspan summarized the other day as follows:

"Current account balances are determined mainly by countries' relative
incomes, by product and asset prices including exchange rates, and by
comparative advantage."

In my post of November 28, I commented thereon as follows:

"When looked at from the vantage point of the "absorption" approach, a
country's current account surplus/deficit is a measure of its "absorption"
of goods and services relative to "output" of same.

"With 5% of US "absorption" of goods and services being supplied by the rest
of the world in exchange for dollar balances, Excess Domestic Credit
Creation has been the principal determinant of the US current account
deficit on Chairman Greenspan's watch."

The Old Maid/Black Queen argument does NOT hold with respect to net US
demand for goods and services from the Rest of the World financed with
Virgin Credit rather than "leakages" out of the US income stream as
envisaged by Greenspan and Davidson.

Indeed, that is why US employment has been relatively high in recent years
despite annual current account deficits of the order of $500 billion.

Gunnar


----- Original Message -----
From: "Ric Holt" <rholt@xxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Cc: "Ric Holt" <rholt@xxxxxxx>
Sent: Monday, December 01, 2003 1:55 PM
Subject: piece by P. Davidson


>