>Dean Baker says that if capital inflows halted, it wouldn't have much of a
>negative effect. The dollar would plummet, the current account would
>dramatically improve, which would add to output and profits, making up for
>some of the lost foreign savings. This is what the textbooks say but it
>seems too mechanical to me.
Where does Dean say this? It seems a little, oh, sunny to me. An economy suddenly deprived of foreign finance would run out of scratch and go into some kind of recession. Financial markets would tank. That would improve the current account position, for sure, but not in a very pleasant way. It would take a long time for a fallen dollar to boost exports. And does he think the Fed would stand by an let the dollar collapse? They'd be very tempted to boost interest rates to defend it, which wouldn't have very happy results. And what about the impact on the rest of the world?
Doug