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April 25, 2005
Why Oh Why Are We Ruled by These Fools (Martin Wolf Now Heads the Order of the Shrill Department)
The mild-mannered and very sensible Martin Wolf out-shrills Paul Krugman--and matches me, at least according to my own internal shrill-o-meter. And all he has to do to reach this pitch is to look around him:
FT.com / Home UK - America's deficits are more than just China's problem: John Snow, the US treasury secretary, insisted that China should embrace a looser exchange rate immediately. 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.... [T]he 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... the American people are able to consume and invest as if the fiscal deficits did not exist. The treasury secretary of... the most fiscally irresponsible US administration since the second world war should fall down on his knees in thanks....
Prof Roubini is also right to note the economic disruption that would ensue if the flow of official international credit were cut off... a dollar collapse, higher domestic prices, a jump in interest rates, a fall in prices of housing, a steep rise in household bankruptcies and, not least, a sharp US recession. The bigger and swifter the adjustment in the external accounts, the more drastic those impacts would be. The landing would be hard.
Nevertheless, it is in US long-run interests to avoid an explosive build-up of net external liabilities. However big the crisis if a sudden correction were to occur now, it would be nothing compared with what would happen after another decade of rising net liabilities. Better still, 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?... a reduction of spending... in the US and an increase in spending in its creditors. A reduction in the US structural fiscal deficit will be required. Exchange rate movement will be needed as well....
[I]t will be impossible to achieve a significant adjustment of the US current account deficit without a big adjustment by emerging market economies.... The huge reserve accumulations of emerging market economies are by now senseless.... 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.
But who is going to begin it with the Bushies in charge?
And it's not the most fiscally irresponsible U.S. administration since World War II. It's the most fiscally irresponsible U.S. administration since before Alexander Hamilton rammed Revolutionary War debt assumption through Congress.
Posted by DeLong at April 25, 2005 02:29 PM