tax cut

Seth Ackerman SAckerman at FAIR.org
Fri Mar 9 13:15:30 PST 2001


Doug Henwood wrote:

Seth Ackerman wrote:


> >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?
.

He said it on the phone to me yesterday. I had the same reaction. He acknowledged that the Fed would likely raise rates to stem the dollar's fall, which really would make things nasty. But his point was that that's not a necessary result of an exchange rate collapse. He said if the Fed was willing to accomodate some extra inflation, then the only damage to domestic output would come from the "secondary effects" of an adjustment to changes in relative prices, which I assume is another way of saying it would take a while for exports to respond.

I brought up the likely effect on the rest of the world, but he didn't seem too worried. Maybe that was me misreading him. As I see it, the effect on Japan alone could feed back on the US in a really ugly way. Taggart Murphy argued that if Japanese exports to the US collapsed, it might force the Japanese to suddenly repatriate their trillions of dollars in Treasury bonds back into yen. In other words, it wouldn't just be a question of a halt in fresh US capital inflows; it could end up with foreigners liquidating their existing stock of US assets.

Seth



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