The ‘great sucking sound’ revisited

I quick­ly get out of my com­fort­able depth when the dis­cus­sion turns to macro-analy­sis and the mys­ter­ies of mon­e­tary pol­i­cy. So I’m hap­py to con­ceed Stephen Kirch­n­er’s more expert “criticism”: (18 August) of “Mar­tin Wolf(Financial Times, subscription)”: over the glob­al impact of the US cur­rent account deficit, now reach­ing 5 per­cent of GDP. But, if I’m not mis­tak­en, Stephen is hit­ting an easy tar­get: you can’t be dog­mat­ic about what a ‘sus­tain­able’ lev­el of the US deficit might be when, plain­ly, investors around the world have an appar­ent­ly unplumbed desire to hold US assets. Stephen is also right, I think, to point out that there could be some unhap­py growth con­se­quences for the rest of the world if the US “cor­rects” it’s trade/investment bal­ance, whether or not by pro­tec­tion­ist action (unless there is also a “size­able rise in domes­tic demand” almost every­where else, in Mar­tin Wolf’s implau­si­ble alter­na­tive sce­nario). I would not be com­fort­able, how­ev­er, with the idea that the rest of the world’s demand for dol­lar assets (includ­ing US debts) could val­i­date almost any US approach to fis­cal pol­i­cy. The rea­son for my unease is that, hav­ing observed the US bud­get process at close hand and from a dis­tance, I reck­on that the US has no fis­cal pol­i­cy at all—most of the time. Cer­tain­ly not one where Con­sti­tu­tion­al ‘checks and bal­ances’ oper­ate or where polit­i­cal feed-back is able to con­trol its ten­den­cy to ‘rac­ing’ con­di­tions. In place of con­trols, the US bud­get process has tem­po­rary polit­i­cal set­tle­ments about spend­ing increas­es inter­spersed with spec­tac­u­lar ges­tures of dis­sav­ing in the form of tax cuts. Fis­cal pol­i­cy stum­bles from one bud­get cycle to anoth­er nei­ther under the guid­ance of of the Pres­i­den­t’s plan (not in any recent Con­gress, any­way) nor whol­ly in the hands of the Con­gress of the day giv­en the pow­er of the PACs and the momen­tum of the fis­cal fly­wheel of non-dis­cre­tionary spend­ing. Some­times, as twice in the past decade, the tem­po­rary set­tle­ments don’t form quick­ly and the US Admin­is­tra­tion actu­al­ly shuts down; to the bemuse­ment of most of the rest of the coun­try. There is almost a lack of account­abilty, it seems to me, for US fis­cal con­trol. Which may be why the US bud­get deficit now absorbs three quar­ters of pri­vate sav­ings in the rest of the econ­o­my (itself down to rates that are post-World War II lows). It has been the Unit­ed States’ (prob­a­bly) envi­able pre­rog­a­tive for many decades to count on for­eign­ers’ dol­lar appetites to bankroll this ride; just as their desire to hold our dol­lar as a com­mod­i­ty proxy has prob­a­bly saved our skin from time to time. But the dif­fer­ence in scale between our two economies, and their very dif­fer­ent roles in world demand and sup­ply, seems to me to pro­vide no rea­son to take comfort—as Stephen does—from the (rel­a­tive) size of our own cur­rent account deficits when con­sid­er­ing the size of the USA’s exter­nal oblig­a­tions. The con­se­quences for trade and invest­ment pol­i­cy? Here I agree, again, I think with Stephen. ‘Pro­tec­tion­ist sen­ti­ment’ is not dri­ven by deficits. It’s endem­ic; an ubiq­ui­tious com­po­nent of the polti­cal atmos­phere like measles in a kinder­garten that can flour­ish instant­ly for no dis­cov­er­able rea­son. But there are real, ratio­nal con­se­quences of the grow­ing US deficit that seem to me to be grounds for con­cern. Prob­a­bly the strongest is that the ‘great suck­ing sound’ com­ing from the direc­tion of the USA is the sound of funds being pulled into the maw of US con­sump­tion from oth­er economies. That means high­er inter­est rates and low­er invest­ment else­where in the world includ­ing Aus­tralia. For­mer US Trea­sury Sec­re­tary Lar­ry Sum­mers “describes(National Perp­sec­tives Quarterly)”:–09-04.html the impact as the sec­ond great­est rea­son for ‘cap­i­tal flight’ from many devel­op­ing coun­tries (the first is their own gov­er­nance prob­lems). Per­haps it’s only Chi­na that is, for the moment, rel­a­tive­ly una­fect­ed. bq. Invest­ment in fixed assets, the main dri­ver of Chi­nese growth, accel­er­at­ed sharply in July as the impact of gov­ern­ment mea­sures to cool eco­nom­ic activ­i­ty began to wear off. Xin­hua, the offi­cial news agency, said fixed asset invest­ment from Jan­u­ary to July rose by 31.1 per cent over the same peri­od a year ago, sig­nif­i­cant­ly high­er than the 28.7 per cent growth rate record­ed for the first half. Fig­ures for July alone were not published.(“Financial Times”: But this, too, could change …

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