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Canberra observed: global imbalances « Previous | |Next »
October 9, 2005

Mark Davis, in an op ed. in Frday's Australian Financial Review, addresses the politics of the economy, foreign debt and the current account deficit. He says that:

Labor wants to rerun the early 1990s debate about external imbalances...So its strategy has been to argue that beneath the apparently untroubled surface of the economy lie imbalances--- underinvestment in infrastructure, shortages of skilled labour and excessive foreign debt--putting future propersity at risk.

He argues that the foreign debt element of this alternative Labor story turns out to be questionable on economic and political grounds. The debt is owed by the public sector not the public sector and the borrowers have predominently been households. So 'when Beazley worries about the shadow cast by foreign debt, his argument really boils down to a call for households to rein in their borrowing and spending.'

In so arguing Davis glosses over the large current account deficit ($1.64 billion in August, and close to 6% of GDP) by saying nothing about the large trade deficits fuelled by domestic demand for imports and the failure of exports to recover despite the growth in the world economy and the resources boom. Was not the resources boom of Quarry Australia meant to resolve the current account deficit? Quarry Australia was the solution not the shift to a high tech or knowledge economy?

Shouldn't we be worried that Australia's current account deficit remains stuck at 6% of GDP? Is not Australia near the top of the deficit ladder? These sort of imbalances cannot grow without limit.

Maybe the complacency expressed by Davis here reflects this upbeat speech by Ian Macfarlane, the Governor of the Reserve Bank of Australia about the global market working fine. In this speech McFarlane says that:

... the Asian surplus [from exports] has to be invested in the rest of the world, and it will tend to flow to those regions which offer the highest return on capital. While foreign investment flows both ways, in net terms it has flowed from Asia mainly to the United States and has underpinned the level of the US dollar, despite the US current account deficit, and provided easy access to finance for US borrowers in the business, household and government sectors.

For the econocrats we need not worry about the global imbalances between China and the US, nor the hugh US budget deficit either. Does that 'no worries' mean that the US can continue to run large trade deficits indefinitely?The US policy makers seem to think that extra debt from pumping up the deficit comes with no strings attached.

As Brad Setser observes China is important. Whilst the rest of Asia's current account surplus is shrinking, and its reserve accumulation is falling, China's current account surplus is rising, as is its reserve accumulation.

Does that not mean that China is financing the US by adding to their portfolio of Treasuries. China, as a developing country, is a creditor of the US, a developed country. Isn't that rather strange? The reverse of what it should be? Does it make sense for developing countries with large current account surpluses to tie their currencies tightly to the currency of the world's largest debtor? How long can this carry on?

Maybe the greenback ought to be depreciated? The other option-- greater fiscal discipline-- is not even a consideration with Bash administration: it spend up big without providing for tax increases to pay for the increased spending.

| Posted by Gary Sauer-Thompson at 11:45 AM | | Comments (0)
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