In response to my comment that a US balancing of its trade deficit could hurt the world economy, Glenn Rayp replied: >>I fully agree concerning with your point on the Keynesian stimulus of the current account deficit, but I have some doubts about its importance (is the US still that big that it can drag the world into a recession ? I don't know if it ever had that power since the fifties)...<< The US definitely has lost its ability to have an aggregate-demand effect on the world, and a study cited in a recent BUSINESS WEEK underlined this fact. But ignored in that study (as far as I can tell) are echo effects: the mild world recession as a result of a US recession encourages deeper recession in the US and vice-versa (so that multiplier effects occur world-wide). The echo effects mean that BW was being too optimistic. Further, I believe that the much of the world is engaged in what I call "competitive austerity": in many case encouraged by the World Bank, the IMF, the bond markets, and financial capitalists in general plus outstanding debt and low profit rates, a lot of countries, provinces, corporations, and individuals are engaging in austerity programs (wage cuts, layoffs, social-services cuts, etc.) in hopes of surviving and getting a leg up in international competition. But this advantage goes away when others emulate austerity. More to the point, such effects encourage world aggregate demand to stagnate or fall. In this context, a balancing of US trade pulls one important counter-acting influence out, encouraging the competitive austerity to have even worse effects than we've seen so far. Glenn continues: >> especially with respect to the main mechanism by which US domestic questions influence the world economy, viz. the dollar. Monetary shocks (in our free mobile capital world), due to a very floating dollar have much more impact on the rest of the world than the expenditure level in the U.S. << I agree that shocks due to monetary events (Susan Strange's "Casino Economy," etc.) are important. But monetary shocks have limited negative impact if the "real" economy isn't in trouble already. I'm arguing that the real economy is in trouble. (E.g., in 1987, the stock market crashed, having little effect on the US or world economy, because the latter was relatively stable, partly due to government deficits.) >>Wouldn't you agree that monetary stability is a precondition for an effective, internationally coordinated, Keynesian fiscal expansion (which requires more or less equilibriated foreign accounts and synchronised business cycles), rather than to lean on the (unsustainable) "efforts" of individual countries ?<< I don't think such monetary stability or such coordinated Keynesian expansion can be organized without there existing a hegemonic power to impose its will on countries that run persistent surpluses. The US is playing this role less and less, and seems to seek advantage for only "its" businesses (i.e., in the current fight with Japan) rather than trying to stabilize world capitalism. More to the point, I don't _advocate_ an individual country doing Keynesian stimulus for the world. Rather, I see this stimulus as happening and indicate the effects of its end. I can't see any significant points of disagreement in the rest of Glenn's missive. in pen-l solidarity, Jim Devine [EMAIL PROTECTED] Econ. Dept., Loyola Marymount Univ., Los Angeles, CA 90045-2699 USA 310/338-2948 (daytime, during workweek); FAX: 310/338-1950 "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- K. Marx, paraphrasing Dante A.
