At the end of a long serious engagement with a recent speech by New York Federal Reserve President Tim Geithner, Brad Setser wrestles with the global economy's $64,000 question.
Geithner -- like most -- recognizes that current account deficits of 5-6% of GDP cannot be sustained indefinitely: the real debate right now is over how long those deficits can be sustained. Geithner, though, argues the flexibility of the US economy may allow a relatively painless adjustment (a Greenspan theme).Indeed every 'soft landing' scenario is predicated upon a massive wave of new US exports which are less and less likely to occur as the US and the rest of the world is hell-bent on destroying the US export base of manufacturing and agriculture. The small and shrinking US services surplus doesn't put more than a dent in the overall current account deficit.
I am a bit less sanguine. The US has a fair bit of experience shifting resources (capital, labor) out of the production of tradable goods; much less experience shifting resources back into the production of tradable goods. Yet it is pretty clear that at some point, the US either has to export more, or it will have to import less -- and the required change is large in relation to the United States small export base (a key point made by Rogoff and Obstfeld, among others). . . .
I don't think there is much evidence that current low interest rates are spurring a wave of investment in US export industries, or in industries that compete with imports . . .
the current pattern of investment is, in part, a byproduct of the distortions created by the Bretton Woods two system of central bank financing for US deficits. The implicit interest rate subsidy from Asian central banks spurs interest sensitive sectors, but Asia's undervalued exchange rates discourages investment in sectors that currently compete with Asia, or will do so in the future. The result: plenty of investment in hard-to-export residential housing ...
Yet this doesn't mean that the system is teetering. Brad winds up his missive by stating "The result: plenty of investment in hard-to-export residential housing ...", but in fact housing has become rather easy to export thanks to the mortgage-backed security and US government agencies like Fannie Mae and Freddie Mac which create and sell them. In fact, exporting our houses is precisely part of the US strategy for financing the trade deficit.
In the 12 months ending October 2004, net US agency bond sales to foreigners hit $218.5bn, a 36% increase over calendar year 2003's $161bn. In addition, selling commercial real estate, industrial facilities and the infrastructure for wholesale/retail trade is part of the strategy. Over the last four quarters (2003:IV to 2004:III), foreign direct investment into the US stood at $96.6bn, a whopping 224% higher than calendar year 2003's mere $29.8bn.
The goal seesm to be to create or provide the context for the creation of expensive new assets with which the US can trade for goods and services. Thus the US sells the means of production and the means of reproduction to foreign capital for current consumption.
A profoundly short-sighted strategy, indeed, almost a form of voluntary colonization. It is also a strategy which only delays the pain. Yet it's also a strategy which I think can still work for a while still. The US has clearly been getting out of the production of goods for over twenty years, and it will take an experience as humbling as was Britain's 1976 IMF crisis to begin a turnaround.