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Home Publications Blogs Beat the Press Ken Rogoff Thinks the U.S. Economy Will Collapse If Its Trade Deficit Declines

Ken Rogoff Thinks the U.S. Economy Will Collapse If Its Trade Deficit Declines

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Thursday, 16 June 2011 04:03

This is the implication of his statement in a NYT column that:

"loans from emerging economies are keeping the debt-challenged United States economy on life support."

Is that so? Suppose that emerging economies announced tomorrow that there will be no more loans to the United States. There would be two responses. First, interest rates in the U.S. would rise. Second, the dollar would plummet, especially against the currencies of countries like China, which have been buying U.S. bonds (e.g. lending money) as part of a deliberate policy to keep down the value of their currency against the dollar. Will these events sink the U.S. economy?

First, it's not clear how high U.S. interest rates will go, since U.S. Treasury bonds remain one of the few safe assets for investors around the world. However, if rates did start to rise precipitously then the Fed could engage in a QE3 and buy huge amounts of debt.

Could this lead to inflation? It is unlikely given the massive amount of excess capacity and huge numbers of unemployed workers in the U.S. economy. However, even if it did lead to an  uptick in inflation, this would be a good thing since it would help relieve the debt burden of homeowners and help to spur growth. This argument was made not long ago by an economist named Ken Rogoff.

What about the falling dollar part of the story? Actually, this is what both the Obama and Bush administrations supposedly have been requesting/demanding from China. A lower dollar is essential for getting the trade deficit down. Everything else is chicken feed. There is nothing in any economist's bag of tricks that will have as much impact on the trade deficit as a 20 percent decline in the value of the dollar.

This should be a headline item in every newspaper every day, since the trade deficit is tied directly to the budget deficit. If the U.S. has a trade deficit, then it must have negative national saving. (It's an accounting identity.) This means either negative private savings (e.g. the zero household savings rate of the housing bubble years) or large government budget deficits.

This means that if deficit whiners understood economics, they would all be demanding a lower-valued dollar. In short, the emerging economies have no weapons against the U.S. They would do us and the world a great favor if they stopped lending us money.

Comments (7)Add Comment
...
written by Doc at the Radar Station, June 16, 2011 6:11
It's a shame this idea is so opaque to so many so-called "experts" out there. The direction of causation is trade deficits > budget deficits, not the other way around. If we became aggressive with balancing our trade, the budget deficit would be on its way to taking care of itself through higher employment > higher tax revenues. Michael Pettis has a good analogy with Spain and Germany (trade imbalances):
http://mpettis.com/2011/06/how-to-become-virtuous-and-save-more/
...
written by izzatzo, June 16, 2011 7:44
Could this lead to inflation? It is unlikely given the massive amount of excess capacity and huge numbers of unemployed workers in the U.S. economy.


Exactly. Let nominal wages fall further to match the lower factor utilization rates of idle capital to match the marginal revenue product of both at the margin in order to reduce employer expectations of uncertainty of sales output in real terms.
Oh, really? Another "inflate our way out of debt" junky.
written by Bill H, June 16, 2011 10:23
"However, even if it did lead to an uptick in inflation, this would be a good thing since it would help relieve the debt burden of homeowners and help to spur growth."

And what does it do for the thrifty, who have little or no debt? What does it do for those on fixed income? Another fan of having the elderly and the unemployed eating cat food, or just starving to death so that people who own 7000 sgft homes can pay for them more easily.

"A lower dollar is essential for getting the trade deficit down. Everything else is chicken feed."

So, $5 gasoline is chicken feed. $6 heating oil is chicken feed? Not when your annual income is $14,000 or less it's not.

Inflation
written by Jeff Z, June 16, 2011 10:58
Bill H,

And a debt deflation spiral is a sunny walk in the park? Even Irving Fisher knew better!

Social Security benefits are indexed for inflation. (http://www.ssa.gov/policy/docs...n3p73.html) It's far from perfect, but people do recognize the problem!

You want to talk individual responsibility, fine, b but you must also address the structural issues faced by the U.S. today. (http://rwer.wordpress.com/2011...#more-5253)
Maybe someone could answer me...
written by Micky, June 16, 2011 6:11
Kind of trying to teach myself this stuff...
would interest rates increase so to attract loans??
and wouldn't that slow the economy?
...
written by axiom, June 17, 2011 12:16
"If the U.S. has a trade deficit, then it must have negative national saving. (It's an accounting identity.)"

wrong

negative "net saving" maybe (S - I)

not negative national saving

Where does Rogoff teach, because I don't want to go there.
written by Benedict@Large, June 17, 2011 1:09
Did someone forget to mention to Ken Rogoff that the US does not fund its spending via bond sales? That all of this is just a fiction for the rubes?

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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