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Treasury comes clean « Previous | |Next »
February 25, 2005

Now the Reserve Bank of Australia may downplay concerns about the US current deficit, widening global trade imbalances, the likelihood of sharp swings in currency markets and rising interest rates.

The RBA trusts the market to do the work to ensure that the US current account shrinks. Is the technocrat McFarlane following the idealogue Alan Greenspan, Chairman of the Federal Reserve, on this? Read Evan Jones over at Alert and Alarmed.

However, the federal Treasury is worried about the consequences of the US current account deficit, and what this may mean for Australia. In a speech to Asian Treasurers Ken Henry, the Treasury Secretary, said:

The issue is the sustainability of such a large imbalance..there are some reasons for concern. For one thing, in the absence of a slowdown in the US economy, the current account deficit is likely to grow even further. One reason for this is that imports are now about one and a half times exports. Even if the world economy grows in a balanced manner, and imports and exports grow at the same rate, the US current account deficit will deteriorate further.

The problem of this trajectory is highlighted by Ken Henry:
...the greater the build-up in structural imbalances, the greater is the risk of a large and sudden adjustment to the US economy, global capital and currency markets; and the more likely an adverse shock to all of our economies.

Will Asia continue to provide the finance the US needs for the system to keep on going?

South Korea recently announced that its central bank is diversifying its foreign exchange reserves away from the greenback to include more currencies. Will other Asian central banks follow suit?

The dollar is vulnerable to any moves by Asia to spread risk by reducing the proportion of reserves held in dollar assets.The risk is that Asia will not be able to fund the US deficits,and so U.S. will struggle to finance its huge current-account deficit. This may lead to a US dollar collapse.

Ken Henry observes:

There is general concern that dollar depreciation by itself won’t do much to reduce the US current account deficit on a sustained basis.

This is an important issue because the domestic governance of the economy requires the development of resilence to international shocks.

There is little point in ignoring or downplaying these shocks, as does the Australian Financial Review. Australia's premier business/economics paper barely comments on the twin deficits in the US or its consequences for Australia. It rarely steps beyond the national horizon of strong economic growth, resource boom, the capacity constraints of skills shortages and infrastructure bottlenecks and the future inflation risk looming. It is all about our resource export industries being unable to get the stuff out of the ground fast enough and the rail and port bottlenecks preventing them shipping the minerals overseas to China.

Evan Jones over at Alert and Alarmed has some good comments on the decay of the Financial Review.

| Posted by Gary Sauer-Thompson at 10:52 AM | | Comments (3)


If the forecast crash eventuates, the question will arise, as to whether it was caused by Keynesian profligacy in the US, or failure by Asia, particularly China and Japan to see the folly of competitive devaluation of their currencies, similar to the 1930s beggar thy neighbour policy. The Friedmanite monetarists would no doubt be laughing at all this if it weren't perhaps so serious and forseeable in their own minds.

I'm not convinced that the current account and budget in the US is caused by Keynesian economics as you claim. Sure, there is a need for Washington to curb government expenditure, given their huge budget blowout.

However, it strikes me as a mixture of personal tax cuts and financing the war economy of the imperial state not from government esxpenditure to boost demand to get the economy going.

What is your argument for calling Bush's Republican supply side economics Keynesian?

"What is your argument for calling Bush's Republican supply side economics Keynesian?"

Well IMO it's a bit of both really so both the Keynesians and Monetarists are in a bit of a cleft stick here. Essentially the GOP have raised military expenditure at the same time cutting taxes. Now normal supply siders would cut both and would argue that international currency markets(free currency marets) would react negatively to this paradox, with interest rate hikes. Unfortunately they haven't, because of their managed currencies. When the manure hits the propellor, there will be a bit of it about for every side to throw at each other.