Greenspan on U.S. foreign balance

Bradford DeLong jbdelong at uclink.berkeley.edu
Thu Mar 14 09:09:06 PST 2002



>Bradford DeLong wrote:
>
>>So then the dollar falls in value until they start buying our
>>goods. It's a problem.
>
>Yup, it's a problem. But will they buy enough of our goods? And
>which goods? Chicken and oranges? Or Pentiums and 747s?
>
>Goldman Sachs did a report the other day estimating that the dollar
>would have to fall by over 40% to balance our c/a. That's a big drop
>that could have some serious effects on the financial markets and
>the exports of other countries. And if we import less and export
>more, out of whose GDP will that come?
>
>> But because of the unique and peculiar role the $$ plays as world
>>unit of account, it would be (IMHO) a problem rather than the
>>catastrophe it would be for nearly any other country...
>
>True, but the scale of the U.S. is so huge that it could be messy.
>
>Doug

Certainly true...

Now back in 1996-1997, when the "balance the world economy up, not down" mantra was first formed and propagated throughout the U.S. Treasury, the Federal Reserve, and the CEA, the consensus judgment was that we had--finally--reached a stage in the evolution of the international financial system that Keynes had hoped to reach fifty years ago with his proposal for the IMF to charge interest not just on loans owed to it but on credit balances held in it, and that (at least as far as U.S.-Europe-Japan were concerned), a large persistent U.S. current-account deficit was as much of (or more of) a long-run problem for the surplus countries than for us.

Hence the decision not to try to balance the U.S. current account by shooting the U.S. economy in the head, but to concentrate on maintaining full employment at home and wait for the other major economic powers to begin taking corrective action--i.e., for Europe to push its unemployment rate below 10%, for Japan to nationalize and then reprivatize its banks, and push its growth rate above 1%. It's primarily their problem, after all.

It still amazes me that--more than five years later--the ECB, the Bank of Japan, and Europe's and Japan's governments have taken no effective action at all...

Brad DeLong



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