Saturday, February 5, 2005
previous entry | main | next entry | TrackBack (0)
The Federal Reserve tackles the current account deficit
I've been a worrywart about the size of the current account deficit -- but yesterday Alan Greenspan said the currency markets and I should relax. Andrew Balls and Chris Giles explain why in the Financial Times:
Here's a link to the full text of Greenspan's speech. Some highlights:
However, Greenspan footnoted the same article to which Brad DeLong links -- "Expansionary Fiscal Shocks and the Trade Deficit," by Christopher J. Erceg; Luca Guerrieri; Christopher Gust. The paper's punchline:
If the paper is correct, then the alleged return to fiscal sanity doesn't matter all that much.
Of course, the crux of Greenspan's argument is that European firms can't afford to cut prices to counterbalance an appreciating Euro. He may well be correct, and I hope he's right -- because China won't be
Developing....posted by Dan on 02.05.05 at 12:10 PM
Are you sure it's not DEvaluaing but REvaluaing the yuan? Isn't the yuan too cheap relative to the dollar and that is exasperating USA's trade imbalance with it? I'm not a trade guy so I'm wading into my own depths here...posted by: foo on 02.05.05 at 12:10 PM [permalink]
You are correct. The Treasury Department has asked China to float its currency in the expectation that it would appreciate in value against the dollar. A weaker dollar would make out exports to China less expensive there, and Chinese imports more expensive here, thus reducing a trade deficit that is much greater than the one we have with the EU. That's the theory.
As Greenspan suggests, it isn't quite that simple in the short term (it's economics over the long term that are simple). Higher prices for imports from China should prompt consumers to buy fewer of them, but this won't happen if there are no cheaper alternatives. And lower prices for American exports to China would lead to a surge in exports only if price were the main reason exports are not higher now. It isn't clear that this is the case, at least not across the board.posted by: Zathras on 02.05.05 at 12:10 PM [permalink]
And just what constitutes "fiscal sanity"?
I see little chance for the balance of payments deficit to be reduced, even if the dollar keeps falling. The simple truth is that US manufacturing has been so denuded over the last couply of decades that there is not enough left to make much of a difference.
And the trend of recent outsourcing of a growing category of professional jobs shows that other nations are increasingly sophisticated and do not have a strong reliance on US services either.
The Chinese are right to say (effectively) 'screw doctrine' and do what is best for their own economy. Perhaps the US government should take note.posted by: x on 02.05.05 at 12:10 PM [permalink]
Greater budgetary discipline? Hello? Anyone home? Guess not. What ever anyone thinks about the SS debate, it's agreed that Bush's proposed solution will be expensive. The low end of the CBO projection for Iraq outlays over time is one trillion dollars. And we haven't even addressed Medicare or increased spending in the rest of the budget. Bush's "goal" is to halve the deficit by the time he leaves office, but no one really believes that will happen except Bush.
Greenspan is just practicing sleight of mind. He's just trading on his reputation to hold things together as long as he can. The deficit is going to blow a hole in any attempt to correct the trade balance. Too bad some people are weak minded enough to fall for it.posted by: oldman on 02.05.05 at 12:10 PM [permalink]
Define return to fiscal sanity. The General Fund deficit is near $620 billion a year. Let's take the lower end of Brad's range (0.3) and multiply that by cutting the General Fund deficit in half (which is less than a return to a long-run solvency path). Cutting the current account by $100 billion is not bad.posted by: pgl on 02.05.05 at 12:10 PM [permalink]
Post a Comment: