Larry Summers on the US trade deficit

Guy at Full Context went to hear Larry Summers talk about the US current account deficit. As he notes, Summers analysis was very similar to the one I presented here. Guy has some useful comments, and notes the following, attributed by Summers to Rudi Dornbusch

Things always happen later than you expect, but when they do happen they happen faster than you expect.

This may not be true of all things, but it is a pretty good description of the way unsustainable economic imbalances are resolved.

5 thoughts on “Larry Summers on the US trade deficit

  1. Hmm that saying is related to “The market can stay irrational for longer than you can stay solvent”.

    Hmm but the Dornbusch quote true? One would think that dramatic changes tend to get remembered, while more subtle changes are not quite so memorable.

  2. T.N. Srinivasan asked about investment opportunities in countries financing the US deficit. I think this is the key question. The US can only get away with excessive borrowing if other parties let it do so. China in particular seems to want to keep the US dollar high to underpin the expansion of its exports but, in so doing, is financing excessive US consumption and acquiriing assets that look set to depreciate.

    The demographic issues seem to be suppressed in the Summers response. What happens to the deficits when the baby boomers begin to retire in 2010? That’s only a bit more than 5 years away.

    Finally, what should Australia’s policy response to this development be? Someone with some expertise in international macroeconomics should be able to tell us. Our own deficit should be controlled — but there are ambiguities in raising interest rates to do this — and presumably Australian investors should steer clear of US denominated assets — although they might want to concentrate capital raisings in the US. Also the Australian public sector deficit should be kept in surplus.

    Beyond this it gets complex.

  3. I presume that China is stepping into the role that was once played by Japan.

    How long has the US got with China propping up the US trade deficit? A decade or less?

    What then? Try a run a weak dollar strategy? That would mean a reduction of flow of foreign capital in the US would it not?

    And just how long can the US Treasury and Federal Reserve stand by and watch the yawning budget deficits?

  4. What is coming down the road for the US seems to be getting clearer, although the timing and how it will play out is up in the air.

    What i would like to know is what the implications for Australia when the this all comes to a head? Will Australia get sucked down with the US into a currency re-valuation and higher interest rates? Or will we be relatively unaffected.

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