[OPE-L:1176] Re: Re: Re: monetary inflows versus capital accumulation

From: Allin Cottrell (cottrell@ricardo.ecn.wfu.edu)
Date: Fri Sep 10 1999 - 14:25:23 EDT

On Thu, 9 Sep 1999, Fred B. Moseley wrote:

> I know that in most circumstances a devaluation of the
> dollar would have a positive effect on the US rate of growth
> (i.e. would reduce the negative net exports). But I don't
> think this will be the case in the current circumstances.
> Because a devaluation of the dollar, especially if
> significant and rapid, would cause an exodus of foreign
> capital, which in turn would bring the stock market down,
> and with it consumer spending and the US economy in general.

OK, I see how that could work. Depends on how "solidly based"
are foreign investors' preferences for investment in the US.
I'm not sure how to gauge that.

> The US rate of growth right now depends above all else on
> consumer spending, which in turn depends heavily on the
> stock market...

I wonder if that might be overstated. It's interesting to look
at the components of US GDP over the last few years. Between
1995.1 and 1992.2 investment has risen from 14.6 to 17.9% of
GDP, while consumption has risen from 67.8 to 69.2%. (Government
purchases have fallen from 18.7 to 16.9%, and net exports have
fallen from -1.6 to -4.3%.) While consumption has increased as
a proportion of aggregate demand, investment seems to have been
the really dynamic component. Of course a big drop in the stock
market would hurt investment too... but I'm not sure how likely
that is.

One other observation (just "thinking aloud"): Yes, it seems
very plausible that the stock market has a lot to do with
buoyant personal consumption in the US -- but could the new
state of the federal budget also be a significant factor? I
think one could make a case that government saving has displaced
personal saving.

Allin Cottrell.

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