Stephen Roach, of Morgan Stanley and Yale, discusses how the U.S. consumer faces a very long period of belt tightening, and how Asia, must increase its consumption to offset the lower U.S demand. If something is unsustainable, then eventually it must stop.
It looks like the massive global imbalance of the U.S. over-consuming and Asia under-consuming is finally going to happen. The consequences for the U.S. will not be pretty, sort of a repeat of the Japan experience of the last 20 years, or worse. However, I think more could be done to address the problems that the lower 90% of U.S. consumers face.
Roach seems to see efforts so far to ease the pain to be merely postponing the inevitable. I suspect he is also underestimating the positive impact that such a rebalancing would have on U.S. output through an improvement in the trade deficit. Interesting read.
Bruce Bartlett, a columnist for the Fiscal Times, and a former staffer for both Congressman Jack Kemp and Congressman Ron Paul, argues that President Obama would be on firm Constitutional ground if he simply ignored the debt ceiling if Congress failed to raise it. He does have a point that a failure to raise the debt ceiling would have serious adverse national security implications, and that the 14th amendment says that the full faith and credit of the U.S. government shall not be questioned.
I’m sure that this is an issue on which constitutional scholars would differ, and a deliberate decision to ignore the debt ceiling law would be a big expansion of executive powers and could provoke a major constitutional crisis. Not the best path to go down, but better than the U.S. government choosing to default.
Kash Monsori, and economic consultant and the author of the “Street Light” blog looks at the total amount of government stimulus (Federal plus State and Local) over the last few years and comes to the conclusion that there has not been all that much of it. It was not that stimulus failed, but that it was not tried.
However, much of the stimulus was not in direct government spending, but in tax cuts and in higher transfer payments, some of which happen automatically, and thus do not show up in the G (Government) of the Y = C + I + G + (X – M) equation, but rather mostly in C (Consumer). He makes a good point, but overstates it.
Michael Pettis of the Carnegie Endowment and veteran China analyst suggests that being the world’s reserve currency is not an unmixed blessing for the U.S. and is in part responsible for the large current account deficits we are running. The current account — or trade deficit — is a HUGE problem for the country, and over the short to medium run, far more serious than the budget deficit, in my opinion.
On a much lighter note, here is a “rap video” of a fight between two of the 20th century’s greatest economists, Keynes and Hayek, that has been making the rounds of the economics blogs. Who knew that this stuff could be “cool”?