>Rakesh Bhandari wrote: > >>(2) what happens if in running deficits, the US sucks up global >>capital, raises interest rates, and visits catastrophe on poorer >>nations? is this possible? > >You're assuming that deficits drive up interest rates. There's no >simple relation between deficits and interest rates. If deficits >rise because of a weak economy - either passively, because of lower >revenues, or actively, as a policy choice - then government credit >demand could be offset by weaker private credit demand. > >And you're also assuming that the U.S. doesn't use the borrowed >money to buy imports from poorer countries. Considering that every >item of clothing I'm wearing was made in a poorer country, and that >the computer I'm typing on was assembled in Mexico - not to mention >what we know from the trade stats - that seems wrong. Demand from >the U.S. has stimulated the economies of Latin America and East and >South Asia more than any interest effect. > >Doug
Doug, this is a helpful answer for it implies the conditions that would be needed for US govt deficit policy not to visit harm outside. 1. if govt credit demand more than compensates for weakness in private credit demand, there could be upward pressure on global interest rates. 2 if the US borrows capital from abroad, it has to keep its markets open. But aside from the abstract possibilities, I am interested in what actually happened with the early Reagan deficits. The Fed did not accomodate, right? Interest rates were high, which helped the US finance govt deficits as a result of regressive tax relief and increased military budgets. And these high interest rates did create havoc in poorer countries, no? But of course the IMF was not able to rein the US in, so the burdens of adjustment were put disproportionately on the poorer countries on which the contradictions of capitalism were biting hard? Rakesh
