House of Paine

DeLong shot wobbles

 this being part two

of the battle of the bratz 


to plunge or to spike 

 both
       or neither 

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" Back in the late-1990s 
the standard talking points
 were that the world economy 
was out of balance....
 could not function indefinitely
 with the U.S. serving 
as importer of last resort" 

"goal
make
 the world economy balance up 
and not balance down 
because balance it would
   and balance soon" 

"Since then 
the U.S. current-account deficit
 has only grown" 

"Is the current situation "unsustainable"? 

"For how long 
could the U.S. continue to run 
a current-account deficit of 7% of GDP?"

 


Assume a U.S. real growth rate of 3.5% per year
 a real rate of return 
on foreign capital invested
 in the U.S. of 4% per year
 and a constant 7% of GDP current-account deficit
 and find that in 2022 
the U.S. net foreign asset position crosses
-100% of GDP
 thats assuming
an over the haul
  average annual 
  current-account deficit 
                 of 7% 
 (a trade deficit of 3% 
 and net income payments 
to foreign owners of capital 
of 4% ) "

 -----------------------------------------

"The trade deficit
 between now and 2022 
has to shrink by an average 
of a little less than 
a quarter of a percentage point
 per year"

" Is the real exchange depreciation
 necessary to support such 
a gradual closing 
of the U.S. trade deficit
 large enough to make 
investments in dollar
denominated securities
 a bad deal at current exchange rates?"

" The private market has voted "no":
 while it is no longer eager
 to take up the flow 
of dollar-denominated assets 
moving abroad
 it is still more than happy
 to hold the stock 
of dollar-denominated assets 
that move abroad in the past"

"There is an alternative scenario 
one in which foreigners'
including foreign central banks'
desired holdings 
of dollar-denominated assets 
shortly hit the wall
 and the asset price shifts 
that result from desired holdings'
 hitting the wall reduce
 or do not increase
 confidence in the dollar" 

"In this alternative scenario
 the U.S. has to move about 
ten million workers 
out of currently-favored sectors
construction
 home-equity-credit financed
 consumer expenditures
 and so on
into export and import-competing manufactures"

" How much structural unemployment
 does such a sectoral shift require
 and how long does
the structural unemployment last? "

Other countries have to shift 
up to forty million workers 
out of export manufactures 
into other industries
 and to generate demand for
 the products of those industries "