Although I don’t keep careful track, I had always thought of Alan Wood as being relatively optimistic about the performance of the US economy, and its implications for Australia. But his latest piece puts him firmly in the camp of the ultrabears. He endorses the calculations of British economist Wynne Godley
But according to Godley’s calculations, using conservative assumptions about US growth, interest rates and private borrowing behaviour, this can’t go on. As the private sector swings back to saving, even if only modestly, the US is heading for current account and budget deficits of the order of 8 per cent or 9 per cent of GDP, with implied foreign borrowing rising from about 25 per cent of GDP to 60 per cent.
The US may be able to sustain the deterioration for some time if it is seen as the best place to invest, as it may be because of the poor economic performance of Europe and even more so Japan. But it is unlikely to be sustainable politically or in financial markets indefinitely. Investors have already taken a pretty big haircut betting on US share prices and the dollar.
So how to adjust? A huge rise in US exports relative to its imports would do it, but that needs a powerful demand expansion outside the US, and how is that going to come about given the state of the European and Japanese economies? Well, a large depreciation of the US dollar could do the trick, but is likely to be resisted by US trading partners.
Godley’s conclusion, which seems all too plausible, is that the US economy will not recovery properly and there will be a long, depressing era of growth recession. Unless, of course, the US can revive the new-economy miracle. Don’t hold your breath.
I’ve been putting forward much the same viewpoint for years, and I’ve done the same calculations on the current account blowout. But a deficit of 8 or 9 per cent is one of those trends that can’t be sustained and won’t be.
I disagree with the assumption that, because US trading partners don’t want a depreciation, they can prevent it happening. I see the adjustment coming through a combination of low growth, inflation and real depreciation – basically a rerun of 70s stagflation.