Fred writes: > Related to the Business Week article sent to the list last > Friday by Jim D. on the danger of the US deficit on the current account and > increasing foreign debt, below is an article in last Saturday's Financial Times, > which concludes that the "day of reckoning" for the dollar > "is close at hand". > > The article emphasizes that the key problem is that it is not > necessary for foreign investors to sell US assets for the dollar to > fall. All that is necessary is that foreign investors cease to buy US > assets, or buy them at a slower rate. And it argues that there are good reasons > to believe that foreign investors may indeed purchase US assets at a > slower rate in the coming months:
the day of reckoning always seems to be at hand these days, but (given the uncertainty of the future) may never happen. If we knew ahead of time when it would happen, we'd be able to get rich quick. (Of course, if we were rich now, maybe we could precipitate it if we wanted to.) The fact is that the inevitable can be postponed. But in the current political economy, postponement simply to increase the problem in the future. To be specific, let's consider the three bears (for the US). The baby bear (as I've called it) is corporate overindebtedness. This has already lead to a massive slide in business fixed investment, which chased that famous burglar Goldilocks out of the house in 2001. That depression of investment doesn't seem to be going away, while Goldie is trying to be avoid being surrounded in the woods. But the Mama Bear (I think -- I'll have to check my ursology) is excessive consumer indebtedness. As part of the Fed's and the government's 2001 bear-baiting, this critter is standing up on her hind feet, threatening to rip poor Goldilocks from limb to limb. She is being kept away by abnormally high asset prices, due to the still-overvalued stock market and the housing bubble (inflated by the Fed's rate cuts during 2001). I have a hard time believing that this bear will be kept at bay when Papa Bear comes crashing in. This is the US current account deficit, which is leading to rising external debt -- and debt service. I recently compared the US GDP to the GNP. The latter is the same as "gross national income" and does not include the production that the US does to pay foreigners for our obligations. It's just recently that the GNP went below the GDP (it used to be that the US benefited from debt service and the like) after the GNP/GDP ratio has been falling since 1979. The US is hardly in the same league as Argentina on this score, but the fabled growth spurt of the late 1990s was not as good as advertised partly because some of that growth went to pay debt service or to other flows of income outside the country. (And there are lots of other reasons, as I'm sure Doug will explain in his book. For example, as Dean Baker has emphasized, depreciation sped up.) The rising external debt encourages the dollar to fall in the near future (if not now as the FT says). It can be delayed, but that simply makes the external debt and debt service larger. This means that it's more likely that the dollar will fall _quickly_ when it falls, especially given the dynamic of speculation. (The hungry Papa Bear is more likely to leap when he's hungry.) A large fall is more of a stagflationary shock to US economy than if the authorities were able to find a way to let the air out of the foreign exchange bubble slowly. And el Maestro Greenspan will have as hard a time as Arthur Burns did if there's this kind of shock. JDevine
