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December 12, 2004
What of the global economy? What can a political hack who writes badly say?
It looks as if the world's central banks are trying to prop up the American consumer by continuing to shore up the US dollar. According to Brad Setser the signs are that the world's central banks are not dumping dollars; in fact they are continuing with the old strategy of buying US dollars.
Why?
Here is one indication from General Glut over at Globlog:
"Japan is keen to develop a missle defense system with the US [to counter China]... Cooperation with the US can't be a one-way street. If the US is to cut Japan in on missile defense, Japan has to help the US out and the easiest and most significant way to do that is not sending a handful of troops to Iraq or a billion dollars to reconstruct Afghanistan. It's to buy hundreds of billions of dollars in US treasuries."
America's twin deficits may be the US's problem but the solutions have to be provided by the others. That's the ethos of US economic policy. We do not hear much about Americans needing to make sacrifices to ensure fiscal responsibility and budget discipline. There is no way the US is going to go on a starvation diet.
When are we going to hear some truth about the economic policies of the Bush administration? When is the Whitehouse going to be called to account?
I do not see that will we have a situation where the world’s central banks continue to provide the US with financing, on the proviso that the US takes credible steps to puts its financial house in order. A profligate US economy is going to defer the economic adjustment needed to reduce its external deficit from $650 billion to $600 (or $550 billion), and to get its fiscal deficit under sustained control.
As the Americans say our dollar, your problem.
So we will continue to have growing global imbalances, an ever increasing US external debt, the decline of the US dollar and pressure on China to revalue its yuan. We have yet to reach the tipping point of the great corrrection.
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Yes it is indded interesting that the austerity measaures meted out by the IMF and the World Bank onto many countries are never talked about in terms of the US.