Setser and Roubini article in Foreign Affairs on the US Twin Deficits: The Risks of Imperial Financial Overstretch
Foreign Affairs has just published an article by Brad Setser and myself where we present a rebuttal of the David Levey and Stuart Brown’s article “The Overstretch Myth” where they argued that the US current account deficits should not be a matter of concern.
I was yesterday morning on CNBC debating Arthur Laffer on supply side economics and the Bush tax cuts. Laffer is the father of the “Laffer Curve”, the idea that tax cuts will not increase the budget deficit but would rather be self-financing given the strong suplly side response of labor, savings and investment to tax cuts. George Bush father referred to Supply Side Economics as “Voodoo Economics” when he was running for the Republican Presidential nomination against Ronald Reagan in 1980. Twenty five year later, supply side tax cuts are still Vooodo Economics!
The occasion for this renewed debate today was the news that in the first 8 months of the 2005 fiscal year, the US fiscal deficit has significantly shrunk relative to the first 8 months of the 2004 fiscal year; revenues are up relative to a year ago. For Laffer and other Voodoo economists this is the proof that tax cuts work. The reality is quite different when you consider the history of supply side economics for the last 25 years.
An interesting debate is taking place on where Latin America is headed and about the growth prospects for this region. In 2004, Latin American growth was 5.8% – the highest in decades – and this year it will be another high growth year for the region. Since Latin American growth had stagnated for decades below that of other emerging market regions (especially Asia) and was dismal as late as in 2001-2003, the data for 2004 and 2005 lead to the important question: has something fundamentally changed in Latin America – in terms of policies, reforms and productivity trends – that will lead to permanently higher growth? Or is the recent experience all cyclical and driven by lucky/positive external fundamentals that are likely to be temporary (high global growth, low global interest rates and temporarily high commodity prices)?
In the classic Kurosawa film Rashomon, a heinous crime is perpetrated in a forest. This crime is reported by four witnesses, each giving his or her own point of view. Who is telling the truth? Who is lying and what is truth? Which version of the story, if any, is the real truth about what happened in the forest?
Today, the large global imbalances are a similar heinous event that requires explanation and interpretation. In this contemporary Rashomon drama, the basic facts are known: the US is running large fiscal and current account deficits while the rest of the world is running large current account surpluses. The flow of capital that is financing these US twin deficits is mostly (three quarters or so) coming from foreign central banks – mostly in Asia but not exclusively – that are aggressively intervening to prevent an appreciation of their currencies.
David Altig (“unofficial” representative of the Fed in blogsphere) reports and comments today on Chairman Greenspan’s and other US officials call for a rapid Chinese currency revaluation and concludes (flattering that my views would be given such prominence):
“I guess they are not listening to Nouriel Roubini“
He is referring to my recent blog where I argued that the US administration was playing with fire (“Biting the hand that feeds one is folly” in the even stronger Martin Wolf words) in asking for a Chinese revaluation without a corresponding parallel fiscal adjustment in the US, as such unilateral Chinese action may trigger a hard landing driven by much higher US interest rates.
Is the US Really Serious or Masochist About Demanding a Revaluation of the Chinese Currency? Playing with Fire and the Risk of a Market Crash
The weekend news from the IMF and G7 meetings was that the US has lost its patience with China and is requesting a rapid abandonment by China of the fixed exchange rate peg of its currency. Some of the headlines were:
Such US views, G7 Communique’ and press headlines then lead to the fateful question: is the US really serious about demanding that China revalue its currency or is the US outright clueless and masochistic?
The new Roubini Global Economics (RGE) Monitor web site has been launched today (www.rgemonitor.com). Most of you have been using my Global Macro Web Site for years now. I have put together a great team of editors, economists and technical folks who have developed and designed a new web site with a wide range of new and useful features. The Roubini Global Macro Site was already ranked as the #1 Web Site in Economics in the world by the Economist Magazine in 1999 when it had only 10% of the its current content. Since then, the site has grown leaps and bounds over the years, but it remained constrained in terms of content, look, design and navigation. Now we are launching a new site – RGE Monitor – that is new and significantly improved relative to the old site both in terms of content and features. The new site is still in Beta version; so your comments and feedback and suggestions will be most welcome.
Massive Capital Losses on Forex Reserves: Is a $300 Billion Loss Spare Change?…Finally, the Message is Being Heard…
For months and months now (at least since last August in our unsutainable US current account paper), Brad Setser and I have been warning about the potential and actual capital losses for foreign central banks from their rapid accumulation of dollar foreign exchange reserves (see here and here and here and here and here and here and here and here) .
Today I was the guest blogger for the “Online Wall Street Journal” blog debate with David Altig (a sharp economist from the Cleveland Fed) on the following topic:
Does Overseas Appetite for Bonds Put the U.S. Economy at Risk? In other terms, should U.S. and global investors be concerned about the concentration of U.S. government bonds in the hands of foreign central banks and the possibility that a move to diversify such foreign reserves could affect U.S. markets and lead to a disorderly adjustment of the US current account imbalance?
It was an occasion for fleshing out in blog debate format my views (presented in my work with Brad Setser) on the risks of a hard landing for the U.S. and global economy given the large global imbalances.
My colleague Brad Setser summarized real well our first impressions of China; we will write soon a longer trip report/paper. Let me elaborate now briefly on a few points.
While the political leadership is saying – at least officially – (and Roach has confirmed their alleged views) that a cooling off of the economy is occurring and that the restrictions imposed in 2004 are working, the reality is quite different; most Chinese economists and policy officials one step below the top political leadership are expressing some serious concerns with the imbalances in the economy.