Re: [OPE-L] Trade Deficit Disorder

From: Alejandro Valle Baeza (valle@SERVIDOR.UNAM.MX)
Date: Fri Mar 17 2006 - 17:27:37 EST

Rakesh Bhandari wrote:

> On Fri, 17 Mar 2006 13:32:26 -0600
>  Alejandro Valle Baeza <valle@SERVIDOR.UNAM.MX> wrote:
>> Dear Rakesh,  do you agree with WSJ that US current account deficit is
>> not a big problem for US economy? Such deficit is about 6% of GDP. Do
>> you think it is unsustainable everywhere but is not a problem in US?
>> best wishes
>> Alejandro
> The CAD may be a bigger problem for US's creditors than it is
> for the US!  As Susan Strange long ago pointed out in Mad Money
> (1998): the US can use "its bargaining power as military protector, or as
> interventionist meddler, or as major trading partner to get its own
> way and to
> make others undergo the painful adjustments."
> At any rate, differential returns does seem to be one
> important factor in why the unsustainable has been sustainable
> longer than most Marxists would have thought.
> For years I have been suggesting that we probe why the apparently
> unsustainable has proven sustainable in what must now be considered
> not the short but medium term.
> Yours, Rakesh
Rakesh, I reply to you with this quote:

"How Scary Is the Deficit?
By Brad Setser et al.

 From Foreign Affairs, July/August 2005


Our Money, Our Debt, Our Problem

Brad Setser and Nouriel Roubini

The U.S. current account deficit -- the gap between what the United
States earns abroad and what it spends abroad in a year -- is on track
to reach seven percent of GDP in 2005. That figure is unprecedented for
a major economy. Yet modern-day Panglosses tell us not to worry: the
world's greatest power, they say, can also be the world's greatest
debtor. According to David Levey and Stuart Brown ("The Overstretch
Myth," March/April 2005), "the risk to U.S. financial stability posed by
large foreign liabilities has been exaggerated." Indeed, they write,
"the world's appetite for U.S. assets bolsters U.S. predominance rather
than undermines it."

But in fact, the economic and financial risks that arise from the U.S.
current account deficit (and the resulting dependence on foreign
financing) have not been exaggerated. If anything, they have received
too little attention -- and are set to grow in the coming years.

Levey and Brown make three basic arguments. First, they claim that
foreign central banks will probably continue to finance U.S. deficits.
Second, they predict that even if foreign central banks do pull back at
some point, private investors will step in. And finally, they assume
that even if this financing does not materialize, a dollar crash would
hurt Europe and Japan more than it would hurt the United States.
Unfortunately, there is a good chance that all of these assumptions will
prove false. Foreign central banks may well stop financing growing U.S.
deficits, private equity investors might not take their place, and the
resulting adjustment process would prove quite painful for the United

Muchos saludos



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