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global economy « Previous | |Next »
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.

| Posted by Gary Sauer-Thompson at 7:47 AM | | Comments (3)
Comments

Comments

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.

BigBob,
it would be nice to see the international institutions that govern the global economy treat the US in the same way as they do other economies.

But as Ross Gitten's observes:


"...there are special rules for America that don't apply to "small open economies" like us.Usually, those special rules allow the Yanks to get away with stuff that we never could."


The rules work in favour fo the US. Presumably, that is why they have such faith in the invisible hand of the market.

Maybe that will change in the near future? As Gitten's goes on to say:


"The Americans have to finance a current account deficit of $US600 billion ($800 billion) a year, which is 16 times our deficit of $50 billion a year. To do that, they have to appropriate far too much of the rest of the world's saving. That's why people say the US deficit is unsustainable - the Yanks are sucking the world dry."


Maybe there will be a great correction.

Well as the dominant world power, I suppose that it should be expected that they will tilt the board their way.

It is concerning because the world is so dependent on the health of their economy.

It would be nice if the pain from their mismanagement could be contained to within their economy. Which it obviously cannot be.