Tuesday, June 22, 2004

New Angry Bear blogger PGL thinks about the massive US current account deficit today, especially its relationship to US savings and why the Asians love our government securities so much.
This was the old excuse for the Reagan current account deficits � they were allegedly foreigners financing a rise in U.S. investment. Only problem was that the Reagan fiscal stimulus crowded-out investment but lowered national savings even more. For this most recent quarter, gross savings per annum defined as GNP minus consumption minus government purchases was only $1343 billion as compared to $1115 billion in depreciation (private) leaving net savings of only $228 billion or a mere 2% of GNP. So with a current account deficit equal to 5% of GNP, net private investment is only 7% of GNP which is below the levels we enjoyed before the Reagan tax cuts and below the levels we enjoyed in the late 1990�s. Yes � the Bush fiscal stimulus is similar to the Reagan fiscal stimulus: it has lowered national savings reducing U.S. investment and increasing the current account deficit. I�m sure Mr. Moore knows this � so why could not been more honest with his readers?
If PGL had read the General's blog on Friday he would have known that the Bush "fiscal stimulus" is not like the Reagan fiscal stimulus in that under the Boy King foreign capital is interested almost solely in government debt. Under Reagan-era mercantilism the Japanese put car factories in Ohio and Kentucky, but under Bush-era free trade they just facilitate the most massive budget deficits in the history of the world.

Since Friday bits of the blogosphere have been consumed by the question "Why do Asian central banks buy so many dollars?". Marginal Revolution offer "seven hypotheses," but General Glut thinks two important ones were left off the list.
  1. East Asia learned the lessons of 1997 and then some. Caught without enough reserves to defend their currencies at the beginning of the East Asian financial crisis, central banks all across East Asia are stocking the kitty with enough dollars to survive the next financial monsoon. The September 2003 issue of the IMF's World Economic Outlook noted that the biggest holder of reserves is now the Global South, and it's not just countries in East Asia -- Russia, for example, is another big holder of dollar reserves. "Current account vulnerability" is a good indicator of reserve holdings, and the reserves boom begins in 1998.

  2. The massive and ever-ballooning US current account deficit is a central plank in the US-centric global economic order. Emmanuel Todd has called it "an imperial levy" and he is not far from the truth. The US has made itself the indispensable global consumer market of first resort. We get goods and services and seem to give the world purchasing power in return, but in reality that power returns to the US through foreign investment, increasingly in US treasuries. Interpreting the global economy in a Keynesian mode, Todd states
    It is the stagnation of demand on a global scale that allows the United States to justify its role as the regulator and predator of the globalized economy, in effect to claim for itself the lead role in a planetary Keynesian state. . . . In his General Theory Keynes has a kind word for the pharaohs who built the pyramids, big spenders who thereby regulated economic activity. Our pyramid is America -- kept intact by the work of the entire planet.
    The US worked hard throughout the 1980s and 1990s to ensure free global movement of capital, knowing both that [a] such flows would trend toward the United States thanks to its powerful capitalist class, its deep financial markets and its stable currency, and [b] such flows needed to come to the US to finance the massive current account deficits the US has run consistently since the 1970s. The British ran the world in the 19th century thanks to dominance in production. The US hopes to run the 21st century as a empire of consumption.

2 Comments:

At 11:44 AM, Blogger PGL said...

I agree 100% with the last paragraph of your Friday blog as far as the current (Bush43) fiscal stimulus. But I would say the same about the Reagan fiscal stimulus. As far as your two additional explanations for the Asian Central Bank intervention, the suggestion that these Central Banks are building up precautionary reserves is both intriguing and reassuring (in that they will not necessarily be cashing them in anytime soon).

 
At 9:29 AM, Blogger Gen. Glut said...

PGL,

I think it would take a real crisis for the Asians to start selling their USD assets; that is, they wouldn't do such a thing voluntarily. However, a hard landing scenario for the US is hardly out of the questions, especially when the Japanese recovery is export-based to both the US and China -- USD economies both. It's a negative feedback cycle par excellence.

 

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