Thursday, June 22, 2006
A Show Of Hands For The 'Enduring Fallacy'
Bloomberg has this editorial. "Former Treasury Secretary Lawrence H. Summers said last week that the $800 billion U.S. current account deficit represents a risk to the global economy and that if its decline isn't carefully managed, it could lead to a world recession. Summers made his remarks at a Boston Federal Reserve Bank conference on global imbalances.'
"In contrast, several of the other conference speakers, including Harvard economist Richard N. Cooper and economist Peter Garber of Deutsche Bank, portrayed the deficits as relatively benign. And a large majority of the roughly 75 economists and academics present indicated by a show of hands that they expect the current account deficit eventually to shrink smoothly to a sustainable level."
"With no sign of strain from financing the deficit last year, or the cumulative $4 trillion over the past 10 years, there was also broad agreement that the big short-fall in transactions with the rest of the world may continue unabated for years to come."
"In recent years, numerous economists have predicted the foreign investors and central banks who..have financed the current account deficits would become reluctant to continue doing so. That hasn't occurred, of course, and now some of those economists are wondering if it ever will."
"Summers labeled that thinking the 'throw in the towel theory.' 'Since the conventional view hasn't been right, that's evidence that view is wrong,' or so that argument goes, Summers said. To the contrary, there's 'more risk now' than previously that a crisis could erupt, he said."
"On June 15, the Boston Federal Reserve Bank's president, Cathy E. Minehan, asked how many of the participants expected a smooth correction of the deficits at some point. So many hands went up that she didn't ask who disagreed. The next day, the bank's research director, Jeffrey C. Fuhrer asked how many thought there was at least a 10 percent to 20 percent probability that a financial crisis would force the adjustment to occur. A similarly large majority held up their hands to that as well."
"Summers derided as an 'enduring fallacy' the notion that a country can decide to save more, have its current account deficit improve and maintain good economic growth while nothing else happens. 'If the current account deficit falls, something else has to change,' Summers said. Exports have to rise, or imports will have to fall, and if U.S. savings were increasing, 'there would be a decline in global aggregate demand' unless growth increased elsewhere in the world, he said."
"In the late 1980s, the last time the U.S. current account deficit declined notably, consumption was little changed for three years while the value of the dollar fell sharply and more goods and services were sold abroad. Obviously something of that sort will have to happen again, only the current account deficit now, at 6.4 percent of gross domestic product and rising, is twice as big as it was then. And U.S. household saving is much lower than then."
"As Summers put it, 'What happens in the rest of the world is probably more important in the resolution of this than what happens in the U.S.'"
"No one at the conference had a clue as to what might happen to cause the deficit to begin to shrink, which is another reason to wonder whether it may be a financial crisis. In the meantime, the deficit is still headed higher."
"In contrast, several of the other conference speakers, including Harvard economist Richard N. Cooper and economist Peter Garber of Deutsche Bank, portrayed the deficits as relatively benign. And a large majority of the roughly 75 economists and academics present indicated by a show of hands that they expect the current account deficit eventually to shrink smoothly to a sustainable level."
"With no sign of strain from financing the deficit last year, or the cumulative $4 trillion over the past 10 years, there was also broad agreement that the big short-fall in transactions with the rest of the world may continue unabated for years to come."
"In recent years, numerous economists have predicted the foreign investors and central banks who..have financed the current account deficits would become reluctant to continue doing so. That hasn't occurred, of course, and now some of those economists are wondering if it ever will."
"Summers labeled that thinking the 'throw in the towel theory.' 'Since the conventional view hasn't been right, that's evidence that view is wrong,' or so that argument goes, Summers said. To the contrary, there's 'more risk now' than previously that a crisis could erupt, he said."
"On June 15, the Boston Federal Reserve Bank's president, Cathy E. Minehan, asked how many of the participants expected a smooth correction of the deficits at some point. So many hands went up that she didn't ask who disagreed. The next day, the bank's research director, Jeffrey C. Fuhrer asked how many thought there was at least a 10 percent to 20 percent probability that a financial crisis would force the adjustment to occur. A similarly large majority held up their hands to that as well."
"Summers derided as an 'enduring fallacy' the notion that a country can decide to save more, have its current account deficit improve and maintain good economic growth while nothing else happens. 'If the current account deficit falls, something else has to change,' Summers said. Exports have to rise, or imports will have to fall, and if U.S. savings were increasing, 'there would be a decline in global aggregate demand' unless growth increased elsewhere in the world, he said."
"In the late 1980s, the last time the U.S. current account deficit declined notably, consumption was little changed for three years while the value of the dollar fell sharply and more goods and services were sold abroad. Obviously something of that sort will have to happen again, only the current account deficit now, at 6.4 percent of gross domestic product and rising, is twice as big as it was then. And U.S. household saving is much lower than then."
"As Summers put it, 'What happens in the rest of the world is probably more important in the resolution of this than what happens in the U.S.'"
"No one at the conference had a clue as to what might happen to cause the deficit to begin to shrink, which is another reason to wonder whether it may be a financial crisis. In the meantime, the deficit is still headed higher."
# posted by Ben Jones @ 10:55 AM 
Comments:
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The mint has a new coin:
'The U.S. Mint unveiled the nation's first 24-karat gold coin Tuesday, hoping to capture a sizable share of the global market for pure gold coins.'
Check out rhodium today.
'The U.S. Mint unveiled the nation's first 24-karat gold coin Tuesday, hoping to capture a sizable share of the global market for pure gold coins.'
Check out rhodium today.
think of the US dollar as a bridge you cross every day. you read about this bridge and the engineers are seriously worried about it's condition, so you stop going over it. 3 years later you see the bridge is still standing and cars are going over it. it's good, right? it is still standing. so you read the latest report on the bridge and the reports says the condition of the bridge has gotten even worse. is the engineer wrong because it's still standing? would you cross it because it's still standing or avoid it because it's worse than earlier?
I love these two parts:
"And a large majority of the roughly 75 economists and academics present indicated by a show of hands that they expect the current account deficit eventually to shrink smoothly to a sustainable level."
and
"No one at the conference had a clue as to what might happen to cause the deficit to begin to shrink"
I also love the fact that economists have been saying for months now that they "expect a soft landing". This always amazes me. Of course they expect a soft landing. When was the last time they arrived at a consensus anticipation of a crash? or the severity of a correction? If anything is historically clear about markets it is that they are unpredictable. (And most of all, economists should know this, because they are the ones who so often scoff at Wall St. prognosticators.) And yet here they are predicting a nice smooth downward curve. Its the arrogance of financial policy makers to believe that they have control over the uncontrollable. When things fall apart, it won't be the policy that's at fault, but some other 'random' event in the marketplace that's to blame.
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"And a large majority of the roughly 75 economists and academics present indicated by a show of hands that they expect the current account deficit eventually to shrink smoothly to a sustainable level."
and
"No one at the conference had a clue as to what might happen to cause the deficit to begin to shrink"
I also love the fact that economists have been saying for months now that they "expect a soft landing". This always amazes me. Of course they expect a soft landing. When was the last time they arrived at a consensus anticipation of a crash? or the severity of a correction? If anything is historically clear about markets it is that they are unpredictable. (And most of all, economists should know this, because they are the ones who so often scoff at Wall St. prognosticators.) And yet here they are predicting a nice smooth downward curve. Its the arrogance of financial policy makers to believe that they have control over the uncontrollable. When things fall apart, it won't be the policy that's at fault, but some other 'random' event in the marketplace that's to blame.
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