Current account deficits don’t matter
There are many things that we teach our undergrads, which then get forgotten (or rejected, if I must be polite) by professional economists. The minimum wage costs jobs, low interest rates don’t mean easy money, trade with China benefits the US, monetary policy remains highly effective at zero rates, etc., etc. I taught all these ideas right out of the textbooks I used, because I believe them. And here’s one more: current account deficits are not a problem; they merely represent an imbalance between saving and investment in a particular region. If we abolished CA deficits for all regions, down to the individual level, we’d have to abolish banks. You want a house? Save up some money.
A recent report by the Peterson Institute at least avoids the worst sort of mistake:
In the latest chapter of the saga over countries that seek unfair trade advantages from currency manipulation, the US Treasury has released a new report aimed at curbing the practice. Treasury is correct not to indict any countries for “currency manipulation” at this time but also to create a “monitoring list” of five major countries—China, Germany, Japan, Korea, and Taiwan—that could become “manipulators” in the future and thus require close surveillance. The objective is to deter countries from returning to past practices of manipulation, and the new Treasury report should be quite helpful in that regard. . . .
However, Congress should not have focused on countries that have a bilateral trade surplus with the United States. All that matters for the impact of currency manipulation on the United States is the multilateral current account balance of the manipulators. In today’s world of distributed production, country X may buy materials from the United States, process and sell them to country Y, which then assembles the final goods for shipment to the United States. Country X would have a bilateral deficit with the United States and country Y a bilateral surplus, yet either or both might be guilty of currency manipulation that distorts the overall US current account balance and economy.
That’s half right, the bilateral surplus doesn’t matter, but neither does the multilateral surplus. There is no plausible harm that could come to the US from other countries running CA surpluses. There are some vulgar old Keynesian models that claim that high saving policies, which can as a side effect lead to CA surpluses, could hurt the US by reducing global AD. Paradox of thrift. I hope no reader of this blog takes those theories seriously. And as for the theory that current manipulation is a “beggar-thy-neighbor” policy, it is refuted every time an expansionary monetary policy move in Japan or Europe leads to a rise in global stock prices “despite” the accompanying currency depreciation.
We would underline the importance of Treasury’s decision to limit “allowable” current account surpluses to 3 percent of a country’s GDP. We at the Peterson Institute for International Economics have analyzed “fundamental equilibrium exchange rates” for years and have concluded that any imbalance above 3 percent of GDP, on either the surplus or deficit sides, is excessive and probably unsustainable; Treasury itself has often cited our estimates in its semiannual reports as authoritative. The staff of the International Monetary Fund has developed norms for current account positions that are even tougher, suggesting that both China and Japan should run no surpluses at all. There has been some discussion of defining a “material” (global) current account surplus at a higher level, perhaps 4 percent of GDP, and Treasury itself sought international agreement on such a norm at the G-20 meetings in Korea in 2010. Hence they are to be commended for concluding that “allowable” surpluses should not exceed 3 percent.
I find these proposals to be frightening, as they are based on a misunderstanding of basic international economics. CA surpluses should be welcomed, as they suggest the surplus country probably has sound fiscal policy, and is not engaged in the sort of ruinous debt run-up that led Greece and Italy and Portugal into their current mess. Most tax regimes strongly distort the saving/investment process, and hence even switching to a neutral treatment of saving and investment would often lead to a big CA surplus. The rest of the world should try to copy Germany and Singapore. We obviously won’t all end up with CA surpluses, but we’ll have more saving and investment, and hence faster economic growth. If the zero rate bound is a problem, then raise the inflation target high enough so that it doesn’t bind.
To see what’s wrong with the 3% proposal, let’s look at the eurozone, which currently runs a 2.8% CA surplus. That’s slightly under the proposed Peterson Institute limit, and hence not a problem. But what about individual eurozone members, should we look at their CA balances? Well, are they engaged in currency manipulation? At first glance it would appear the answer is no, they don’t even have their own currency to manipulate. It would be as crazy to complain about the CA surpluses of an individual eurozone member as it would be to complain about the CA surplus of Massachusetts, (which is not actually measured (AFAIK) but would probably be at German proportions if it were.)
And yet, the report does name Germany as a country to watch, probably because its CA surplus is 7.7% of GDP. But then why not pick on the Netherlands, at 9.7% of GDP? And why focus on individual eurozone countries, but not individual US states? Believe it or not, it’s no longer enough to stop all “currency manipulation”, the CA surplus opponents now want to stop the sensible countries from being sensible, they want them to start running up large budget deficits. After, all the recent Chinese case proves that this is not about currency manipulation. China is working hard to prevent the yuan from falling, despite their large CA surplus. Germany doesn’t even control their currency, and at the ECB they always push for a stronger euro.
It’s a myth that CA surpluses are some sort of “imbalance” that markets would correct if only governments would stop manipulating the currency. Is Massachusetts manipulating the US dollar? Indeed, without recent Chinese “manipulation”, the yuan would fall and their CA surplus would expand even further. To their credit, the smarter Keynesians understand that the CA surpluses actually reflect saving/investment differentials, and can only be attacked with government policies aimed at reducing that imbalance, i.e. with tax cuts and/or higher government spending.
But in that case, Massachusetts is just as guilty as the Germans or the Dutch. Maybe someone should put sanctions on Massachusetts’s products until my home state starts running a Puerto Rican-style fiscal policy.
In Australia they use Australian workers to build $400,000 condos on the beach, and then trade the condos to the Chinese in exchange for 400 HDTVs made by Chinese workers. If both sides agree to this transaction, what possible harm could it do? Can someone explain that to me? But in the world in international economics, there is something sinister about this voluntary exchange, as it leads to a $400,000 CA “deficit” for Australia, and a “surplus” for China. What does that even mean? In America we might trade the mortgages on homes built with American labor, for Chinese goods. Again, there is supposedly something sinister about this normal business transaction. I don’t get it.
Of course it could be worse, in the world of American politics the transaction would be described as China “raping” the US.
PS. Commenter HL suggested that Japan’s recent problems with an appreciating yen flow from the passage of this new law:
The latest step by Treasury was required by the Trade Enforcement and Trade Facilitation Act (the “customs bill”), which became law in February 2016.
I’m not sure if that’s true, but it’s interesting that Japan’s recent problems began in February. In fact, the BOJ needs to drive the yen far lower, and thus they should say “to hell with the US”. Unfortunately, they probably need to wait until mid-November to make that move. And even then, the Japanese are too polite. The others can ignore us, however. We can’t touch the Germans as they are in the EU. And China now has the world’s biggest economy; it’s too late to kick them around. If Trump’s elected he’ll find himself kissing Xi’s ring.
PPS. Over at Econlog I have a new post discussing the recent moves in the yen.
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2. May 2016 at 15:09
In a shocking turn, I’m going to make this about housing!
I think the full story is even worse. Here is a post where I have a slide from a speech from Ben Bernanke:
3.5.3http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.pdf
It shows a correlation between house prices and current accounts. His argument was that the developing economy savings glut was what led to both low interest rates and high home prices. He’s got the causation backward, though.
Why isn’t the savings glut flowing into Germany?
The reason is that supply constraints on housing are creating arbitrary limits to entry into tech, finance, etc. in places like London, San Francisco, New York, Sydney, etc. So, countries with these cities have firms that are capturing economic rents – excess profits – because there are limits to access to their highly interconnected creative labor force, due to housing constraints. These cities have firms which are earning excess foreign profits. This is why even though, year after year, foreign capital flows into the US, the US still retains net foreign income, because these economic rents allow US firms to earn more than they should. This is what funds the trade deficit – foreign savers have to keep pumping capital into the US, which doesn’t capture excess profits, just to keep up. If we hadn’t been running a trade deficit for the last 20 years, our net foreign income would be astronomical.
The causation is: limited housing/labor access causes both localized high home prices trade deficits. So, the trade deficits aren’t due to some currency trick that developing economies are playing on us. They are due to our own limits to competition, which mean we are skimming the cream off the top of those economies. We are the bad guys here.
Germany and Switzerland have trade surpluses and they have housing policies that don’t lead to crazy high home prices.
2. May 2016 at 15:10
Oops. The link was to the actual slide show. Here is the link to my post, which isn’t a pdf.
http://idiosyncraticwhisk.blogspot.com/2016/03/housing-part-123-profit-margins-and.html
2. May 2016 at 15:33
Switzerland in general has a very supply constrained housing market, with very high property prices and rent controls.
2. May 2016 at 15:42
. The rest of the world should try to copy Germany and Singapore. We obviously won’t all end up with CA surpluses, but we’ll have more saving and investment, and hence faster economic growth. — Scott Sumner
This is theoretically correct, of course. Yet today there are gluts of commodities, huge overcapacities in manufacturing (20+% in autos), tip-top prices paid for institutional commercial property, interest rates to the floor (or below). Capital is “super-abundant” says Bain & Co. Bernanke called it a global capital glut.
Save more? Or demand more?
There is also the new reality that a central bank can create capital by printing it. What happens when a central bank buys securities or real assets? The sellers get money which they can reinvest and which becomes capital!
Macroeconomists need to develop a monomania for boosting demand (equal to the obsession for controlling prices, that has defined the profession for the last 35 years). How to expand aggregate demand? Especially in a deflationary era.
On current account deficits: yes Australia can sell all the prime beachfront property to Chinese and live in the less-desirable desert. Become waiters and bellhops at tourist hotels. From a cosmopolitan international perspective, or the viewpoint of the Han Chinese, great! If you are an ordinary Aussie….
In a way, this is happening in every Pleasant place to live on Earth. Economically successful people are migrating to the great places to live in supplanting present residents. No more Okies and Arkies in West L.A.
2. May 2016 at 16:18
Arilando, that’s true. I think the policy differences in Germany and Switzerland are subtle. I think there is less difference in costs between cities. The constraints there are demand side constraints instead of supply side. In the US and other problem countries, we have demand-side subsidies (tax deductions, etc.) and localized supply constraints. My understanding in Switzerland is that they don’t encourage homeownership. I think they even tax imputed rent.
So, the end result is that housing consumption is much lower in general, but it doesn’t serve as a gateway to lucrative job markets.
2. May 2016 at 16:18
I just got it.
Helicopter drops are superior to conventional quantitative easing. Conventional QE largely ends up as capital, hence the equities rallies.
Helicopter drops end up as demand.
The world needs demand now, not additional gluts of capital.
2. May 2016 at 17:06
Benjamin Cole:
The world does not need more demand. Demand always outstrips the ability produce.
We need more production, which requires less consumption ceteris paribus.
More production requires money liberalization.
2. May 2016 at 19:18
Major Freedom:
Hey, I am all for reducing structural impediments. Ban property zoning and decriminalize push-cart vending. Cut taxes on productive behavior etc. All in.
But right now the globe is glutted with productive capacity. Steel mills glutted! Potash mines glutted! The world could produce another 20 million cars annually without a blink.
Name for me one industry straining to meet demand, an cannot do so as capital is so tight.
(Oil is a funny one due to OPEC).
Major Freedom, dude-friend, have a beer and remember ideology is not reality. Worshipping totems is for the deluded masses.
Print more money until we are wiping our asses with Ben Franklins, and I will buy you a drink in Full Tilt Boogie Boom Times in Fat City.
Down some cosmopolitans with a couple big-titted blondes, and then tell me about the Austrians. In fact. tell the blondes.
2. May 2016 at 20:25
Benjamin Cole you should really try to read some textbooks on macroeconomics and actually get an understanding of what demand means in macroeconomics. Pretending money isn’t approximately superneutral in the long run has gotten very old.
2. May 2016 at 21:44
Trevor Adcock:
Around 1939, with the world in depression, and resultant militarism of the most horrible kind in full flower, one might be hard pressed to say money is “superneutral.”
So what if it is? Societies nations and people respond in years and seasons.
A man lives but 75 years, and how many of those are wage-earning years? I can’t wait a few centuries for super neutrality to work (and it is only a theory, in a world of huge structural impediments and institutional imperfections).
Much less dramatically, the same holds for 2009.
And we do not need any sanctimonious sermonettes about the Perils of Inflation from little boys in short pants.
Let’s make some big money and belly up to the bar in Fat City.
Helicopter drops? Send in the B-52s. And wake me when inflation is north of, and unemployment is south of 4%. For a few years.
Or perhaps you would like an afternoon of tea and crumpets with Janet Yellen instead? You can discuss of fearful it is that the PCE is at 1.7%, so close to 2%! Very alarming, no?
2. May 2016 at 22:22
“There is also the new reality that a central bank can create capital by printing it. What happens when a central bank buys securities or real assets? The sellers get money which they can reinvest and which becomes capital!”
No. Look up the definition of capital.
2. May 2016 at 23:26
Chuck: huh?
I sell $1 million dollars of Treasuries to the FED. They printed up the money to buy from me. I finance the expansion of a woodworking facility. How is it not capital?
By my decision, I compelled savings and investment from the economy.
2. May 2016 at 23:39
Fed money creation does not create capital. It creates money. Whatever is done with the money does not change that fact.
3. May 2016 at 04:03
Off topic:
Did one Scott Sumner see this video about the housing bubble in Australia:
http://www.abc.net.au/4corners/stories/2016/05/02/4451883.htm
3. May 2016 at 04:30
Eight out of 14 posts to date are by Kevin Erdmann or B. Cole. Why don’t they start their own blog? And tell us things like why there’s never been a housing bubble (citing Germany, which BTW likes to rent not own big houses, unlike in the USA, duh). No wonder I stopped reading this cite (your loss)–nothing to learn here. As for the OP, current account deficits indeed to matter, as you are relying on your past glory to sustain present consumption. Question for the student: what happens when the US dollar no longer is considered the ‘reserve currency of the world’? Oops! As Erdmann would say.
3. May 2016 at 04:57
As a side story, related to your comment. I was talking to a dog friend yesterday and he brought up, same as you did, Brazils markets loving Dilma heading out the door (THANK GOD!!!! – It’s a start). Now for fun, line up commodities against the Real and you will see both had their 2 inflection points, before turning, on almost the exact same dates. Jan 21 and the week ending Feb 12.
Always so hard to tell what equates to what in a multivariable world….
3. May 2016 at 05:04
And since that sounded confusing, by 2 inflection point each, I am referring to the fact they both stopped crapping out at the same time (Jan 21) and they both gave up trying to crap out (and turned around) on end of week Feb 12.
3. May 2016 at 05:53
Ray “Tiny Sword” Woepez: Kevin has a superb block, and I sometimes blog at Historinhas.
Worth reading….
3. May 2016 at 07:25
Never reason from a current account balance. Sometimes it matters, sometimes it doesn’t.
3. May 2016 at 08:41
Kevin, You said:
“If we hadn’t been running a trade deficit for the last 20 years, our net foreign income would be astronomical.
The causation is: limited housing/labor access causes both localized high home prices trade deficits.”
I agree with the first sentence, but am not convinced by the second. I suspect a lot of it is the higher returns earned by US multinationals, relative to the 1% that Asian governments are earning on T-securities.
Ben, You asked:
“Save more? Or demand more?”
Both.
Not sure what you mean by printing capital.
And the Aussies are doing just fine.
Willy2, Glad to have you back. Long time, no see. Who turned out to be right the last time we debated this issue, when you said the Australia bubble was bursting?
Derivs, Not sure what you are talking about, but you sure know one very smart dog.
Steven, Or perhaps it never matters, but sometimes the thing causing the CA deficit matters.
3. May 2016 at 12:14
Actually, the Aussies aren’t doing quite fine enough. Far from worrying about bubbles they’ve just cut rates unexpectedly and tanked the AUD. They won’t listen to US sermons about currency “wars”.
http://bloom.bg/26OWYAZ
3. May 2016 at 12:31
Interesting that Aussie fiscal easing had little impact on its own.
http://bloom.bg/1X6ar39
3. May 2016 at 16:49
Benjamin Cole:
“Hey, I am all for reducing structural impediments. Ban property zoning and decriminalize push-cart vending. Cut taxes on productive behavior etc. All in.”
Except the structural impediments that exist by virtue of the state even existing. Socialist money, protection and security, law making, etc, etc. All these are “good” structural impediments, and hence not really impediments.
“But right now the globe is glutted with productive capacity. Steel mills glutted! Potash mines glutted! The world could produce another 20 million cars annually without a blink.”
The doctrine of “savings glut” (another phrase meaning the same thing as a “productive glut”) is a myth and is refuted by economic theory and is consistent with the evidence. You are starting with the a priori beliefs that:
1. The main problem of economic life is the vulgar Keynesian consumptionist doctrine that there needs to be an exogenous to the market activity, aggressive activity, that needs to use extraordinary means to increase consumption in order to accommodate and justify the alleged inexplicable tendency of production to “outstrip” the ability to consume.
It is derived from the fallacy of composition whereby what is true for one firm, i.e. the dependency on “demand” to justify its investments, to the economy as a whole where “demand” has to be pushed artificially higher than market in order to prevent these “savings gluts” from stalling economic progress. In actuality, the dependency is reversed. At the level of the economy as a whole, consumption depends on production, and there is no such thing as too much savings. There is no such thing as too much productive capacity and not enough demand for that capacity. The human race’s desire for more and better quality goods always outstrips the ability to produce. Savings and investment activity ould theoretically be 99% of all activity, and there would still be nowhere near enough production to satisfy human wants.
It is not true that the only thing holding people back from dealing with this alleged savings glut is the ability to spend more money, as if more pieces of paper circulating and higher prices is going to somehow magically result in no greater nominal investment and only consumption. Money inflation from central banks leaves the banking system predominantly by way of lending to businesses for the purposes of investment. To “advocate” for more money printing is to advocate for more lending to businesses for the purposes of more investment. To believe this is a solution to “savings glut” is like believing the solution to hangovers is more alcohol.
“Name for me one industry straining to meet demand, an cannot do so as capital is so tight.”
You don’t seem to realize that demand does not arise exogeneously from industry savings and investment. The demand that businesses have for their products comes almost exclusively from the very same investments businesses make in wages and capital. For it is wages and the incomes earned from selling capital that finances the very “demand” you arbitrarily claim is insufficient.
Of course individual businesses want more demand. But this does not imply that the solution this is for there to be higher aggregate demand from inflation. Demand in the individual business sphere is offsetting.
I am not that surprised that you have spent years with a belief that is based on a total fallacy. It is so easy to go from the fact that an individual business is better off with a higher spending for its products, to the belief that whole economies of business’s can be helped by anti-market inflation that redirects wealth while at the same time increasing tota spending which is believed to benefit all businesses.
“Major Freedom, dude-friend, have a beer and remember ideology is not reality. Worshipping totems is for the deluded masses.”
You don’t seem to want to accept the fact that you are an advocate of an ideology. The totem you worship is the ideology that mankind are “trousered apes” who if left to market forces would choke on their own savings. This is abject Keynesian nonsense.
The truth is that demand springs out of business activity, out of savings and investment. All the money you will ever spend in your entire life as a wage earner, will have been financed from within the savings and investment process. You are in a position to “demand” anything because someone else decided to save and invest in your labor. They decided to increase the “production glut” and have you add to the wealth available to sell.
The view of humanity you have includes the belief that the only reason businesses produce is to hoard money. With this view, it is only natural that you would then believe that the solution to this is for there to be another, separate group of people whose only job is to spend money to give businesses what they want.
The truth is that businesses in the aggregate can finance their own consumption. They not only do not need an external entity that brings about more money and spending, but they are on net harmed by it, becaue while they all earn more pieces of paper, and trading away real goods in return, the people who bring about more money and spending are not themselves increase the pool of goods for businesses to buy for themselves. Money is put into the economy, goods are consumed with that money with no goods being put back in to the same degree.
The Fed gives billions of dollars a year to the Treasury for free (the Treasuries the Fed “buys” earn interest principal which is remitted right back to the Treasury for nothing, and this is according to law), and the money the Treasury spends incurs a net loss on society. You pretend to want a reduction in structural impediments, yet the billions the Treasury spends goes towards financing state power which is the very impediments in question. The state cannot spend without creating impediments.
“Print more money until we are wiping our asses with Ben Franklins, and I will buy you a drink in Full Tilt Boogie Boom Times in Fat City.”
Benjamin you’re deluded. You’re like a Weimar citizen right before the hyperinflation. You say “print more money”, but you never bothered to research in detail exactly how that money flow operates, nor the people involved and their real activity.
Printing money incurs opportunity costs. It is not a free lunch. There is no such thing as a free lunch.
“Down some cosmopolitans with a couple big-titted blondes, and then tell me about the Austrians. In fact. tell the blondes.”
You’re like a Jerry Springer fan.
3. May 2016 at 17:56
OT – Sumner is not as radical as he seems, as one poster remarked here. He’s a defender of the conservative status quo. I call on Sumner to state his views whether targeting NGDP can be achieved by having the US Fed directly lend money to the US Treasury, as happened in both the Civil War and in WWI (J. Grant, “The Forgotten Depression, 1921”, Fed directly lent Treasury $330M out of $22B lent indirectly via sales of public bonds), both times successfully. Already in another comment Sumner has agreed with the ex-MN Fed Chair of Indian surname that in today’s low-inflation environment, the Fed printing money and giving it to Treasury would not be much different than QE. So it argues that in low inflation times, direct Fed to Treasury injections are not that bad. Well Sumner? Time to show your ‘red’ credentials. Are you really as radical as you claim or just a defender of the ancien regime? I think I know Sumner pretty well by now: make noise, be vague, contradict himself (e.g., does or doesn’t Sumner believe in the Fisher Effect?), but not really do much except ride on the coattails of the “Target NGDP” movement but from a safe distance, being vague, so as to be able to distance himself from its failure, if and when it’s adopted, and, predictably, it fails (money is neutral after all).
However, if Sumner is truly revolutionary and truly believes money is not endogenous, not neutral, he’ll call for direct money injections from Fed to Treasury. Sumner? A column on this please. Absent Sumner (who would be wise not to touch this Third Rail issue) I’ll settle for the idiotic Thai turkey farmer Ben “Fat Head City” Cole’s views on this topic. Well?
3. May 2016 at 18:38
Cruz just quit.
I do not see how the GOP establishment can stop Trump now.
What a story.
The deepest GOP bench in 30 years and Trump cut them down like they were blades of grass in front of a samurai sword.
3. May 2016 at 18:42
Ray “Tiny Sword Woepez: all quantitative easing is a helicopter drop. It just depends who gets the money.
Do a helicopter drop the money into capital markets, or helicopter the money into people’s pockets?
I will blog on this soon. If you can find a scabbard small enough, sheath your sword.
3. May 2016 at 23:25
“The state cannot spend without creating impediments.”
Infrastructure investment spending of the government will increase both the marginal product of labour and capital [New Keynesianism and Aggregate Economic Activity by Assar Lindbeck – Economic Journal, 108, 1998 pp167-80]
4. May 2016 at 00:24
I agree with a fair bit in this post, however, one of your statements is rather odd: “CA surpluses should be welcomed, as they suggest the surplus country probably has sound fiscal policy, and is not engaged in the sort of ruinous debt run-up that led Greece and Italy and Portugal into their current mess.”
Venezuela has had current account surpluses (often huge ones) for much of the past 15 or so years. http://www.tradingeconomics.com/venezuela/current-account-to-gdp
If you just said that CA doesn’t matter, it would be more defensible.
4. May 2016 at 01:25
James brought up Australia now trying to take down their currency. You and my friends smart dog both made comments about Brazils markets moving with news on Dilma. What I am saying is look at AUD, BRL, and for fun throw in CAD. Look how they are all either moving because of Dilma or simultaneously starting a currency war, because they all 3 are moving in sync. All 3 turned on Jan 17. Now look at the Thompkins Reuters index for commodities and see what date the nose dive in commodities ended, and how similar the move since then has been to the CAD-BRL-and AUD. Without a central bank and if there were no Dilma I think all 3 countries currencies would have looked very similar to what they do.
My comment was made because I actually went to Econlog and saw your comment about quakes and/or the yen.
4. May 2016 at 02:50
“The deepest GOP bench in 30 years and Trump cut them down like they were blades of grass in front of a samurai sword.”
Hillary will be next. He’s too shifty and out of the box for her to handle, Besides, she has always appeared to me, akin to a champion at 9 furlongs that likes to pull out of the gate in front and lead the whole race, now trying to run a mile and a half at Belmont.
P.S. I remember someone calling someone silly when they were the first person on this site to declare him a serious contender. Outcomes are often so much clearer (and still far from clear) when you demand of yourself to always be an impartial observer, no matter how much you hate the thought of the outcome.
4. May 2016 at 05:30
@Ben (gay) Cole – OK, link here since I don’t waste my time over there. I look forward to reading your article, but keep in mind you must specifically address: (1) Fed dropping money on Treasury, which spends it, and (2) potential for mischief of this, and precedence. It’s one thing to increase base money when nobody is borrowing but I think it’s quite another to directly drop money from Fed to Treasury, which will affect the government debt market.
4. May 2016 at 14:05
He’s a defender of the conservative status quo.
Really? He just seems like a suburban bourgeois for whom the staff on his campus are just pairs of hands and who doesn’t really give a rip about anything going on outside his immediate social circles and the conversations they have. That’s not really ideological.
4. May 2016 at 15:53
https://thefaintofheart.wordpress.com/
Ray Lopez: here you go. Let me know your incisive observations, backed by rapier wit.
QE sure looks like a helicopter drop.
4. May 2016 at 16:41
Ray, You said:
However, if Sumner is truly revolutionary and truly believes money is not endogenous”
It’s cute that you don’t understand that these statements are not even false. Because that statement has no meaning, it cannot be true or false.
Anand, The CA surpluses mean nothing, in and of themselves, but countries that have sound fiscal policies are more likely to run CA deficits. The exceptions you cite are exactly why we should ignore CA balances, and look at the underlying economic fundamentals.
Derivs, I was wrong about Trump’s chances to get the nomination. But events have proved me right about the GOP, and also about how Trump is a complete moron and a demagogue. Think about all of the idiotic things he’s said since January.
4. May 2016 at 18:49
and also about how Trump is a complete moron and a demagogue.
The ‘complete moron’ has been running a large diversified business concern for 40-odd years and has just taken a major party presidential nomination with a campaign he built from scratch in just 10 months.
Why not switch to saying Trump’s poopy-pants. It’s more precisely descriptive.
5. May 2016 at 00:51
Why not switch to saying Trump’s has connections with organised crime. It’s more precisely descriptive?
http://www.alternet.org/election-2016/slickest-con-man-out-nyc-donald-trump-set-be-gop-nominee-despite-links-organized-crime
5. May 2016 at 03:59
– I was right, not one S. Sumner. But one S. Sumner wasn’t paying (too much) attention to this topic. And it seems he didn’t watch the video (see above).
– Steve Keen has a very simple formula to predict the direction of an economy: Income + change in debt = GDP.
– Read on how MACROBUSINESS takes down the myth of a prosporous Australia. E.g. the australian ANZ bank cuts its dividend as a result of a sagging business investments and increased write-offs.
http://www.macrobusiness.com.au/2016/05/anz-delivers-profit-shocker-cuts-dividend/
Do I have to say more ?
5. May 2016 at 06:57
Derivs, I was wrong about Trump’s chances to get the nomination.
I actually respected your acceptance of that quite a bit.
“Trump is a complete moron and a demagogue. Think about all of the idiotic things he’s said since January.”
Not a complete moron by any means. I grew up in NY watching him so it’s simply Trump being Trump, he decided he wants to and therefore should be President. Most certainly a demagogue and Demigod for that matter as well. But equally entertaining is the crazy, having their back against the wall, shit people say about him. Hitler from Jewville City with the Jewish son-in-law… It’s a bit much.
Like you said.. IQ goes to the toilet when people talk politics…
5. May 2016 at 07:28
“Read on how MACROBUSINESS takes down the myth of a prosporous Australia. E.g. the australian ANZ bank cuts its dividend as a result of a sagging business investments and increased write-offs.”
I read the link, the person should learn to read a balance sheet. Maybe notice that over 60% of that write-off was due to software capitaliz(s)ation and another 15% was due to non-recurring restructuring costs which may be actually seen as a positive NPV positive move.
5. May 2016 at 18:09
“There are some vulgar old Keynesian models that claim that high saving policies, which can as a side effect lead to CA surpluses, could hurt the US by reducing global AD. Paradox of thrift.”
Scott, if you have any better explanations for weak global AD, I’d love to hear them. Preferably without the anti-protectionist prolephobic hysteria. It’s not like the Chinese are the big culprits anymore (the eurozone is).
Also, the current account doesn’t matter? That’s a very easy thing to say when the CA deficit is small to begin with.
5. May 2016 at 23:05
– So, the ANZ considered software to be an asset instead of costs ?
– The state of Western Australia is (heavily) dependent on mining and saw as a result their taxrevenues go down. And in the slipstream of that real estate prices in Perth have “softened”.
http://www.perthnow.com.au/realestate/news/perth-wa/real-estate-wrap-perth-leads-nation-for-falling-house-prices-in-2015/news-story/a353c9153825fd79d32168a3b202ffdb
5. May 2016 at 23:27
– Remember what with WorldCom in 2001 ? They played the same game as the ANZ and it sank the company.
– Current Account Deficits DO matter. The US had a growing CA deficit from 1990 up to 2006. And the doubling of defense spending under the Bush administration increased the CA deficit. And increased defense spending gave the US housing market an extra push into bubble territory during the 2000s.
– The USD being the world’s reserve currency also pushes the CA deeper into the red. Let’s assume that Canada or Europe buys brazilian iron ore. The mere fact that iron ore has to be paid for in USD pushes the CA deficit here in the US deeper into the red. And therefore subsidizes the US consumer (more).
– Never read the work of one Michael Pettis ? Instead of talking of “Exorbitant Privilege”, he talks about “Exorbitant Burden”.
http://blog.mpettis.com/2014/10/are-we-starting-to-see-why-its-really-the-exorbitant-burden/
5. May 2016 at 23:53
@Wily2, be prepared for hordes of people telling you you’re wrong about reserve currencies, and this means you must, naturally, be wrong about everything else, including CA deficits, as well.
IIRC, there is a lot more disagreement as to whether or not being a reserve currency is a good thing than whether the run-up in the CA/fiscal balances post-1990 worsened (or triggered) the financial crisis (they did). So of course, people will use the controversy of the first to cast taint the relative certainty of the latter.
6. May 2016 at 12:06
@Joseph Eagar & others:
To understand why one has to have knowledge of the intricacies of the (international) Balances Of Payments. And how balances of payment work on an international scale.
And Mr. Michael Pettis has that knowledge.
7. May 2016 at 06:10
Joe, The better explanation is monetary policy. Obviously CA surpluses can’t explain anything at the global level, as the global CA balance is zero.
Willy2, You said:
“Never read the work of one Michael Pettis ?”
The guy who predicted that China would grow at 3% between 2010 and 2020? Yes, I’ve read him many times.
7. May 2016 at 09:09
– Between 2008 & say 2011/2012 China grew at OVER 3% but I highly doubt that China grew\will grow after 2012 by 3%. Perhaps that will average out to 3%. We’ll have to see. I am NOT holding my breath.
– If you’ve read Pettis then why do/did you say that “CA deficits don’t matter” ? Running a CA deficit DID matter in Greece, Italy, Spain, Portugal & Ireland in 2010, 2011 & 2012 !!!
– If you don’t like that the US is running a CA deficit then the solution is VERY simple. Increase taxation here in the US by say 10, 20 or 30%. Decrease wages, salaries, Social Security, (government) pensions, Social Security, Medicare & Medicaid expenses, Entitlement payments by say 10, 20 or 30%. Extremely simple.
Then “Consumption” will go down as well at the same pace and then US imports & the US CA deficit will shrink as well. Then the CA deficit & the trade deficit will go down to ZERO. Problem solved !!!!
It’s the same medicine that was prescribed in Brazil in the early 1980s and it was what happened in the PIIGS countries in Europe.
It’s also know as the “IMF model”. And the US has a choice: Either reduce consumption (as described above) VOLUNTARY or wait until the financial markets FORCE the US to reduce its consumption.
8. May 2016 at 00:26
Scott, the Chinese’s ‘pro-savings policy’ consisted of restraining consumption while weakening the currency with sterilized monetary intervention. That still counts as ‘monetary policy’, right?
I do agree that the eurozone mess is entirely the fault of the ECB, but it has had the effect of making Germany more competitive in world markets than it otherwise would be. It may also have damaged the ability of America and the Chinese to coordinate policy.
If I were the Treasury secretary (and of course I’m only guessing) I’d want the Chinese to devalue a little, for several reasons: a Chinese hard landing could be very dangerous for the U.S., both economically and geopolitically; the Chinese have mostly “followed the rules” in recent years, and (perhaps I’m reaching here) can probably be trusted not to take advantage of the situation to engineer a permanently bloated CA surplus; and most of all, the Chinese were rather nice to us after 2008 (they gave plenty of space to reduce our fiscal deficit, much more than Germany gave even responsible countries like Ireland and Spain).
But, global AD is depressed, and thanks to the global media’s sympathy for the Germans (does it really matter that they are acting out of stupidity and not malice?) the American public has no idea that it is the Germans, the not the Chinese, who are the problem.
I don’t envy the task Jack Lew has before him.
8. May 2016 at 00:31
@Willy2, what do you think the U.S. has been doing for the the past six years? Exactly that! Except we tacked on monetary loosening to offset the fiscal austerity (this is what’s known as “devaluing in real terms”).
8. May 2016 at 01:54
– Agree for the full 100%. But the US CA deficit hasn’t shrunk too much. Nothing like the shrinkage in 2008 !!!
– Also DO NOT underestimate the impact of the chinese credit bubble since say late 2008, on world demand.
– One also has to keep in mind that (South) East Asia had its own credit bubble. That bubble was fueled by the chinese credit bubble.
9. May 2016 at 07:58
“In Australia they use Australian workers to build $400,000 condos on the beach, and then trade the condos to the Chinese in exchange for 400 HDTVs made by Chinese workers. If both sides agree to this transaction, what possible harm could it do? Can someone explain that to me? But in the world in international economics, there is something sinister about this voluntary exchange, as it leads to a $400,000 CA “deficit” for Australia, and a “surplus” for China. What does that even mean? In America we might trade the mortgages on homes built with American labor, for Chinese goods. Again, there is supposedly something sinister about this normal business transaction. I don’t get it.”
You have a friend who consistently spends more then he earns. Let’s say he blows it cheap plastic crap at Wal-Mart that ends up in the trash a month later. He bought those items on credit. The stuff is gone, but the debt remains. Nothing he spent the credit on increased his ability to earn, so he can’t pay back the debt.
Wouldn’t you criticize this friend. Say that he was making bad choices. I certainly would, and have. Good people try to get their friends to make better choices that will lead to better outcomes in the long run.
These transactions were voluntary, but did they leave the man better off? How will he live now? What will that debt mean to his quality of life going forward? Will he be able to provide his children with things we consider critical? In general I find people later regret such decisions.
If you can view an individuals decision as bad, as likely to ultimately end up in bad circumstances and regret, why can’t you apply that to a nation?
Certainly, you think that spending on the Iraq War was bad. We have to pay that debt off, and we got nothing lasting of value out of it that would help to pay off that debt. By your logic we could just say that deficits caused by the Iraq War don’t matter. In fact that war probably contributed to our Current Account deficit.
Only if you define voluntary actions as automatically good can spendthrift actions be justified. If you don’t think voluntary actions are automatically good, then you can evaluate them individually. Blowing your countries productive assets on consumption isn’t good. Anymore then taking out a second mortgage to spend it on hookers and blow is good.
A Current Account isn’t good or bad. It depends what you spent the money on. Taking out a loan to start a business? Good. Hookers and blow? Bad. When we look at what America spent the money on, its clearly bad.
12. May 2016 at 10:05
[…] the topic of this book makes sense. I agree with most of the arguments, though not the view that trade surpluses are essential for understanding the problem. This book is good for fans, at the very least, but it will not convert the […]