The current issue of Foreign Affairs contains the rebuttal that Nouriel and I wrote to the David Levey and Stuart Brown’s “Current account deficits do not matter” article that appeared in the March/April issue (Real title of the Levey/ Brown article is “The Overstretch Myth”).
Levey and Brown have a short rebuttal to our rebuttal as well. Their rebuttal puts forward a variant of Bernanke’s argument. Levey and Brown emphasize excess savings in Europe and Japan. Bernanke, correctly, identifies the world’s emerging economies, not Europe, as the home of the “savings glut.”
Regular readers of this blog will not find much new in the Foreign Affairs . Most of themes covered in the article have been discussed here in greater length.
But some of you may still find it interesting. Nouriel and I did try to be somewhat provocative.
I suspect the following sentence will catch a bit of flak:
“These banks [foreign central banks] are not buying dollar-denominated bonds because they are attracted to US economic strength, the high returns offered in the United States, or the liquidity of US markets; they are buying them because they fear US weakness.”
And so will this:
“Asian policy makers, in particular, view US economic policy not as a model but as a problem: the United States’ “exorbitant privilege” — Charles de Gaulle’s term for Washington’s ability to finance deficits by printing dollars — comes at their expense.”
In the article, Nouriel and I put forward the thesis that economic power usually flows to creditors not debtors. It is hard to run an (informal) empire “on the cheap” for long. That too, no doubt, is a controversial statement. I would certainly be interested in hearing dissenting views. Certainly one can argue that a debtor of the United States size poses such a problem for its creditors that it has a bit of leverage in a pinch — though I personally would not want to test that proposition.
The core argument of this blog was expressed in the riff that ended the Foreign Affairs piece:
“Arguing that deficits — external as well as domestic– do not matter does not make them go away. Celebrating the United States’ real economic strengths while the real — and growing — economic vulnerabilities associated with unprecedented current account deficits is dangerous.”
Update: For more on the comparison between the “American” and “British” (informal) empire check out Nouriel’s blog. Remember, the US was a major creditor country through the early stages of the cold war, and at the height of its empire, the Great Britain was a major net creditor to the world.