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April 20, 2005
Roots Subj: Fin Sec. and Wolf, FT; Financial Balance of Terror
Martin Wolf again has an excellent analysis of the rather dodgey position the world's economy finds itself in, with regards to global financial flows.
US deficits aren’t just China's problem
By Martin Wolf
Published: April 19 2005 20:47 | Last updated: April 19 2005 20:47
http://news.ft.com/cms/s/b3cf88b0-b107-11d9-9bfc-00000e2511c8.html
""If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has." John Maynard Keynes"
After the pitty quote from Keynes (Keynes was indeed a real master of pithy quotes one is constantly reminded, our man Wolf has a bit of fun pointing out that while the quote appears to reflect US official thinking, it may not be true:
"If Keynes was right, the world's creditor countries have a huge problem and the US none at all. Yet the assumption that the creditors should be more terrified than the debtor is wrong if the latter needs to continue borrowing. 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.
The last line is both amusing and true. And it gets better (as an aside I suspect it is the following kind of writing that had clueless nitwits at Political Animal echoing the clueless post bashing The Economist and whinging on about the snottiness of the writing. Whinging gits.)
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". If anyone was in doubt about what that meant, 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. But he accurately reflected the "China-bashing" now sweeping across US politics, so painfully reminiscent of the Japan-bashing of past decades.
I personally found the monkey line priceless, but I may have a mean streak.
Wolf highlights the rebuttal well enough (although sometimes biting the hand that feeds one is quite useful):
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.
Queer that, the most fiscally irresponsible administration - true and a lesson about ideology versus practicality, and believing one's one agitprop to the point of willful denial of reality.
However, the real issue here is not solely the madness of the Bush Administration, but rather the overall system. And most seriously the degree to which adjustment has to involve major changes in emerging market behaviours as well as on the part of the profligate navel gazing US.
Posted by The Lounsbury at April 20, 2005 05:07 PM
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Jan-July 2005
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