April 19, 2005
Martin Wolf on "Global Imbalances"
FT.com / Comment & analysis / Columnists - US deficits aren't just China's problem : If creditors face an endless stream of additional borrowing and a good chance of default at the end of it, they should refuse to throw good money after bad. They will then impose huge costs on the debtor. This balance of financial terror, as it has been called, characterises the current huge flows of finance to the US. Carefully thought through economic policy is needed if the world is to extricate itself from this predicament. Alas, we can rely on the administration of George W. Bush not to provide it.
So it proved at this weekend's meeting of the Group of Seven leading industrial countries. The communiqué remarked that "we emphasise that more flexibility in exchange rates is desirable for major countries and areas that lack such flexibility".... Mr Snow is not the organ-grinder of US economic policy but the monkey.... As Nouriel Roubini of New York University promptly responded, the US attack on one of its principal creditors is playing with fire. In the past two years, he argues, three quarters of the US fiscal deficit has been financed by foreign central banks, 100 per cent of the fiscal deficit has been financed from abroad and about 80 per cent of the current account deficit has been financed by foreign central banks. Biting the hand that feeds one is folly.
According to the International Monetary Fund, the US general government fiscal deficit this year will be 4.4 per cent of gross domestic product, while the current account deficit is forecast to be 5.8 per cent of GDP. At present, therefore, the American people are able to consume and invest as if the fiscal deficits did not exist. The treasury secretary of what is arguably the most fiscally irresponsible US administration since the second world war should fall down on his knees in thanks rather than indulge in complaints....
Nevertheless, it is in US long-run interests to avoid an explosive build-up of net external liabilities... instead of choosing between a sudden correction now and a still more brutal sudden correction later, why not go for a smoother correction that starts now? The requirements for such a correction are clear.... A reduction in the US structural fiscal deficit will be required. Exchange rate movement will be needed as well, to facilitate adjustment.... [I]t will be impossible to achieve a significant adjustment of the US current account deficit without a big adjustment by emerging market economies. These are the world's natural deficit countries.... The huge reserve accumulations of emerging market economies are by now senseless. These are not only wasteful investments but also prevent the global adjustment that the private sector rightly wishes to make. Emerging market economies should run current account deficits equal to inward FDI. Hectoring China on the exchange rate alone is folly. But a serious discussion of policies to deliver a better global balance is not. That discussion must begin now.
Posted by DeLong at April 19, 2005 09:26 PM