Why Oh Why Are We Ruled by These Fools (Martin Wolf Now Heads the Order of the Shrill Department)

The mild-mannered and very sensible Martin Wolf out-shrills Paul Krugman--and matches me, at least according to my own internal shrill-o-meter. And all he has to do to reach this pitch is to look around him:

FT.com / Home UK - America's deficits are more than just China's problem: John Snow, the US treasury secretary, insisted that China should embrace a looser exchange rate immediately. Mr Snow is not the organ-grinder of US economic policy but the monkey.... As Nouriel Roubini of New York University promptly responded, the US attack on one of its principal creditors is playing with fire. In the past two years, he argues, three quarters of the US fiscal deficit has been financed by foreign central banks, 100 per cent of the fiscal deficit has been financed from abroad and about 80 per cent of the current account deficit has been financed by foreign central banks. Biting the hand that feeds one is folly.... [T]he US general government fiscal deficit this year will be 4.4 per cent of gross domestic product, while the current account deficit is forecast to be 5.8 per cent of GDP. At present... the American people are able to consume and invest as if the fiscal deficits did not exist. The treasury secretary of... the most fiscally irresponsible US administration since the second world war should fall down on his knees in thanks....

Prof Roubini is also right to note the economic disruption that would ensue if the flow of official international credit were cut off... a dollar collapse, higher domestic prices, a jump in interest rates, a fall in prices of housing, a steep rise in household bankruptcies and, not least, a sharp US recession. The bigger and swifter the adjustment in the external accounts, the more drastic those impacts would be. The landing would be hard.

Nevertheless, it is in US long-run interests to avoid an explosive build-up of net external liabilities. However big the crisis if a sudden correction were to occur now, it would be nothing compared with what would happen after another decade of rising net liabilities. Better still, instead of choosing between a sudden correction now and a still more brutal sudden correction later, why not go for a smoother correction that starts now?... a reduction of spending... in the US and an increase in spending in its creditors. A reduction in the US structural fiscal deficit will be required. Exchange rate movement will be needed as well....

[I]t will be impossible to achieve a significant adjustment of the US current account deficit without a big adjustment by emerging market economies.... The huge reserve accumulations of emerging market economies are by now senseless.... Hectoring China on the exchange rate alone is folly. But a serious discussion of policies to deliver a better global balance is not. That discussion must begin now.

But who is going to begin it with the Bushies in charge?

And it's not the most fiscally irresponsible U.S. administration since World War II. It's the most fiscally irresponsible U.S. administration since before Alexander Hamilton rammed Revolutionary War debt assumption through Congress.

Comments

[jm]

Forward the Light Brigade!

[dilbert dogbert]

I spend a wonderful 3 day weekend enjoying the most wonderful spring flower displays in years and on coming home innocently wonder what is going on on Brad's blog and the !!!God Damm World Is Comming To And End!!! More of the worlds most stupid dog, more of the kids, more on Japanese rice cookers, more math puzzles please!!!

[Movie Guy]

No innocence here...

Wolf: "This balance of financial terror, as it has been called, characterises the current huge flows of finance to the US. Carefully thought through economic policy is needed if the world is to extricate itself from this predicament. Alas, we can rely on the administration of George W. Bush not to provide it."

Ok, the Bush team doesn't believe that budget deficits are a problem. Got that.

Next.

No mention of the other players? The U.S. Congress, Fed, WTO, and various U.S. trade agreements.

We can fix the federal budget deficits rather easily. But what is plan for trade imbalances?

What did the economists of the world and U.S. supplysiders think was going to happen once global free trade was opened up?

This is ridiculous.

Imbalance was virtually guaranteed in the near term.

[Frank]

Brad:

Wasn't the buldup of debt circa World War II and the Civil War far greater a problem than what is occuring now?

Frank

[Nope. The buildup of debt was for a reason--the two wars were very just causes, and taxes had already been raised as high as the government dared without fearing truly destructive supply-side effects on the economy. Lincoln and Roosevelt were making hard choices and good decisions in tough times. Bush... is chief clown in the clown show.]

[lee]

China has already make noises about widening the peg and changing the composition of its trade reserves. Now that the Bush Admin has make the front page with its demands, any move on China's part will be "framed" as some sort of political capitulation...even though China would have done the same thing regardless of pressure from Washington.

It wouldn't surprise me if China is being set up as the straw man in the event of a U.S. economic slowdown or recession. If we "muddle through", it was because the White House "pressured" China to behave. If we encounter trouble, we can blame China for not moving fast enough or far enough...take your pick.

It's the Iraq strategy all over again. Bin Laden attacks, blame Iraq and invade. Kind of like kicking the dog when Grandma farts. Always find someone to blame, preferably ahead of time.

[lee]

China has already make noises about widening the peg and changing the composition of its trade reserves. Now that the Bush Admin has make the front page with its demands, any move on China's part will be "framed" as some sort of political capitulation...even though China would have done the same thing regardless of pressure from Washington.

It wouldn't surprise me if China is being set up as the straw man in the event of a U.S. economic slowdown or recession. If we "muddle through", it was because the White House "pressured" China to behave. If we encounter trouble, we can blame China for not moving fast enough or far enough...take your pick.

It's the Iraq strategy all over again. Bin Laden attacks, blame Iraq and invade. Kind of like kicking the dog when Grandma farts. Always find someone to blame, preferably ahead of time.

[Michael Robinson]

Frank, I don't know if that's such a good spin: "We're facing a fiscal crisis eclipsed only by the two deadliest calamaties our nation has ever suffered."

[Michael Robinson]

lee, exactly, and that's exactly why I wrote earlier (http://delong.typepad.com/sdj/2005/04/bruce_bartlett__1.html):

"Maybe the Chinese government should simply announce they will repeg the RMB on August 1 to a rate specified on or before July 1 by the U.S. Secretary of the Treasury.

I'd pay good money for tickets to that show."

That would firmly place all responsibility for the consequences on the Bush administration (which would be as useful domestically as internationally for the Chinese government). Watching the the Bush adminstration try to wriggle off that hook would be entertaining in the extreme.

[RonK, Seattle]

It's the carbuncular option: if we lance that thing now, it will spew pus all over the room ... but if we wait, and wait, and wait, just maybe it will burst of its own accord, but on somebody else's watch.

[RonK, Seattle]

Frank -- The WW II debt spike consisted primarily of domestic dollars taken off the street (where corresponding consumer goods were in short supply). There was no explosion of foreign debt (or of capable foreign lending). Much of the portfolio was nonmarketable, and even non-interest-bearing, and the counter-inflationary effect helped stabilize US currency.

Not good spin, not a good comparision.

[dsquared]

I think I may need to get out the ouija board and start channelling Montagu Norman again. The world and his wife appear to have forgotten that in any fixed-exchange rate standard, the burden of adjustment falls on the debtor country.

[IJ]

But can economic globalisation really succeed? The whole enterprise depends on the commitment of each of nearly 200 nation states, and rising, to make the system work.

The commitment of the US administration, for example, to economic globalisation is seriously on the wane, thinks a staunch defender of the concept- Thomas Barnett.

". . . wartime security considerations will see us tighten up our borders beyond all utility, and by doing so we'll damage our economy directly while putting our longterm development at risk in two ways: by curtailing our access to immigrants who've fueled our growth in the past and should logically continue to do so in the future; and by none-too-subtly encouraging great powers the world over to create their own economic rule sets that exclude America-especially in Asia. . . The mindset of the WWIV advocates is surprisingly non-global in vision." http://www.newrulesets.com/journals/barnett_25apr2005.pdf

[Weco]

This theory of balance of financial terror always seems very peculiar and I don't think the Bushies should bet on it. There's always the possibility, when sufficiently desperate, that China will start dumping its Treasury holdings. (Or simply not show up in the next auction). Some will argue it make economic sense for them to drop out anyway. Where's the balance when the other guy's holding all the weapons?

(The theory of financial terror holds a lot better between China and Taiwan. Despite the recent rhetroics, the entire coastal area will collapse if a war ever gets going. Something the party can ill afford.)

[Elaine Supkis]

AARG.

Our deficits are NOT a problem for CHINA, it is for us, but not them.

THIS IS THEIR PLAN. They planned for this. This is their goal!

They scored! Goooooooaaaaal!

We lost. We are doomed. We are doomed because even very smart people can't figure this out. They can't see through rank propaganda. Oh, and we are not Chiina's number one customer anymore, either. This is also part of their long range plan.

[Platypus]

I seem to recall that one of the justifications for the war in Southeast Asia back in the 60's was that America was in a titanic struggle for world domination against the evil Chinese (and Russians). It would be a great irony if the authoritarians in Beijing used the tools of capitalism to win that long battle through economic rather than military domination. However, with great help from the Bush administration, it would appear that China is on track to accomplish what the American right so greatly feared years ago.

[Ellen1910]

Snow is right!

His function is to keep China recycling its dollars and buying our debt. The fear is that at some time in the not so distant future, China will experience such monetary inflation that it will have to undertake a dramatic RMB revaluation (its current preferred anti-inflation method -- credit controls -- isn't working).

If that happens, our credit markets might well freeze up. Better to have a modest adjustment now.

[Ellen1910]

Snow is right!

His function is to keep China recycling its dollars and buying our debt. The fear is that at some time in the not so distant future, China will experience such monetary inflation that it will have to undertake a dramatic RMB revaluation (its current preferred anti-inflation method -- credit controls -- isn't working).

If that happens, our credit markets might well freeze up. Better to have a modest adjustment now.

[matt]

Is this really part of China's long range plan or is this part of the Bush family's long range plan to impoverish American workers and their families for generations to come, to have them reduced to virtual wage slavery (the term still applies) in an economy with jobs that produce nothing tangible, and to keep them in such a state in perpetuity?

It's kind of like the reverse of what Bush and his minions in Congress just achieved by repealing the estate tax-people will now be locked for generations in meaningless work; a college education will become less affordable or available to a large number of Americans; debt relief via chapter 7 is no loger available; and the retirement age will be put at a specific number so that no one will have to worry about collecting social security, they'll die first welcoming another shopper to Wal-Mart.

[bncthor]

Lee..."If we "muddle through", it was because the White House "pressured" China to behave. If we encounter trouble, we can blame China for not moving fast enough or far enough...take your pick.."

Lee has it mostly right. In the meantime, we should all eat, drink, and be merry. At least drink. As the Bushies keep reminding us, everyday, in every way, every thing is getting better and better. What's to worry?

[Barkley Rosser]

Max Sawicky has wisecracked that the "ownership society" will be run by the Central Committee of the Communist Party of the Peoples' Republic of China.
As for that WW II debt, even that which had interest had very low interest rates reflecting the pre-Fed-Treasury-Accord era where the Treasury Secretary had more pull with the Fed to keep the cost of patriotic borrowing down. Plus, with rationing, people had little else to do with their money than patriotically by War Bonds.

[Barkley Rosser]

Max Sawicky has wisecracked that the "ownership society" will be run by the Central Committee of the Communist Party of the Peoples' Republic of China.
As for that WW II debt, even that which had interest had very low interest rates reflecting the pre-Fed-Treasury-Accord era where the Treasury Secretary had more pull with the Fed to keep the cost of patriotic borrowing down. Plus, with rationing, people had little else to do with their money than patriotically by War Bonds.

[Frank]

Some counter arguments:

Well, isn't the debt being accumulated currently to fight the War on Terror? Wouldn't the supply-side effects of raising taxes to eliminate the debt be quite negative.

Regardless, wasn't the debt so high after both the Civil War and World War II that they had long-term negative effects on the US economy? As I recall, the debt to GDP ratios back then were from 80-150% Wouldn't that make our current fiscal predictament less damaging than the prior two massive debt accumulations?

And does it really make a difference if the bonds are bought domestically rather than abroad? Debt is debt, right?

I am curious if the neo-liberals on this blog will engage in a nativist, Lou Dobbs style argument that T-bills held by foreigners are awful, but those held be citizens is sacrosanct.

And please, I am not a spin-mister or Luskin supply-sider (I love this site and I agree with most of its content.) I just think these arguments deserved to be vetted.

[anne]

The questions are useful but need much refining and I lack for time now. A quick point about debt being debt to show how subtle the question can be. The combination of government deficit and minimal household saving means that we must import capital to make up the difference. Lots of capital, and in turn we owe more abroad. This year America will pay more in investment returns abroad than we receive. Income earned abroad has for decades been a fine gain for us. No longer so. We have serious economic problems that can not be wished away, though I wish they might be :)

[aiontay]

Frank,

Clearly the war in Iraq and Afghanistan has something to do with the deficit, but I really don't think you can compare the current situation to WWII. Both my parents grew up during the Great Depression and WWII (my father was a pilot, but didn't serve overseas). There was rationing, a draft, open warfare on just about every continent, etc. Frankly, unless you happen to be in the military or in a military family, this war has little impact on your daily life. I mean, are you planting a victory garden and worrying about your gas ration? I doubt it. My mother told me years ago about having here classes dismissed at her high school so the kids could scour the countryside down in SW Oklahoma looking for scrap iron and steel on the farms to be recycled for the war effort. When your local school lets the children out early to look for scrap metal, then maybe the WWII analogy might be valid.

[chris]

The amount of money lost in spillage in Iraq due to corruption, waste, fraud, profiteering, is probably greater than that spent in Afganistan. The fourth anniversay of 9/11 is coming up, Osama is still alive, I'm still angry and want revenge.

[Barkley Rosser]

To Frank. Supply siders forecast that the Clinton tax increases would stomp the economy. The 1990s still look better than the 1980s or the current decade. Our taxes are so low, we can easily handle an increase.
Regarding WW II, the interest rates on that debt were so low that the interest/GDP ratio was lower than during more recent periods, such as late 1980s and early 1990s, although I am not sure about today.