Agathon: Who look tired.
Kapelikos: Freshly back from the other coast. Airline load factors are just too high.
Agathon: Who were you talking to?
Kapelikos: MegaBankCorp--their investors.
Agathon: What were you talking about?
Kapelikos: The usual--global imbalances.
Agathon: And what did you say?
Kapelikos: That the global economy is unbalanced--that current patterns of trade are unsustainable--that things that are unsustainable eventually, somehow, stop. What else can you say?
Agathon: And the argument on the other side? I'm not sure I understand it.
Kapelikos: I know I don't.
Agathon: Is it roughly this? "U.S. real GDP is growing at about $400 billion a year. At a capital-output ratio of 3.5-to-1, that means $1.4 trillion of new America-located wealth each year. We can sell off $1 trillion of that every year to foreigners in order to finance our import bill. And still be richer than we were last year. What's unsustainable about that?" Is that the argument?
Kapelikos: Could be. But that's incoherent--it misses the difference between the trade deficit and the current account. Ten years down the road the current-account deficit is not $1 but $1.4 trillion--$1 trillion of net imports and $0.4 trillion of interest, rent, and profits owed on foreign-owned property here. To hold the annual current-account deficit at $1 trillion requires that the trade deficit shrink, which requires that the dollar decline, which means that foreigners investing in America are making bad decisions.
Agathon: And when do your models predict the dollar will fall?
Agathon: Three years ago?
Agathon: But as long as people believe the argument on the other side, the dollar doesn't decline, and the argument looks correct?
Kapelikos: Yep--for one more year.
Agathon: How many more yars are you going to be saying, "Wait just one more year"?
Kapelikos: Until I can say, "I told you so."
Agathon: Can't you be more specific than that?
Kapelikos: Ok. How about this. International financial crises tend to come--currencies crash--when interest rates rise in the world economy's core. The Bank of Japan has just joined the ECB and the Federal Reserve in raising interest rates.