1. The presentation of the key data on global imbalances is superb. Setser has followed this issue closely for years and knows the dark side of the data as well as the published numbers. He explains the situation clearly and gives us telling diagrams. For those of you who want a quick refresher on global capital flows, this is an excellent place to begin.
2. He does a superb job of puncturing the pollyannaish notion that America’s creditors would never allow a dollar crash. Here is an argument from the standpoint of elementary economic rationality:
...it is in China’s financial interest to stop buying dollars sooner rather than later. Buying dollars today allows China to avoid registering a fall in the value of its portfolio today, but it only adds to the size of China’s dollar portfolio and thus to China’s expected future loss. U.S. financial stability relies on China’s ongoing preference to take larger losses in the future rather than a smaller loss today.
And here is another from the standpoint of political economy:
...democratic change in countries with a large stock of U.S. assets could be a threat to U.S. financial stability. A more democratic Gulf region almost certainly would be far less willing to hold U.S. assets—whether because of concerns about the risk of financial losses, concerns about financing American foreign policy in the Middle East, or a desire to spend more at home. A more democratic China would face similar pressures.
3. On the other hand, he misses the connection between sovereign capital inflows (unbidden by market returns) and asset bubbles, a point I have pushed in the past. Caballero et al. pick up on this, although their model makes the bizarre assumption that flows on the capital account are driven by private investors.
4. On still another hand (Vishnu?), Setser underestimates the trigger potential of private capital. Specifically, he doesn’t consider the possibility that a further rise in default risk in US financial markets could initiate a burst of capital flight beyond the capacity or willingness of sovereign creditors to absorb.
5. When he gets to remedies, Setser rightly points to the crushing burden of oil imports, but he also falls back on the discredited notion that current account deficits are driven by net savings. He offers soothing words about how he only wants to reduce fiscal deficits over the business cycle and not in the downturn, but squeezing domestic demand is the only possible channel by which his medicine could work. (If you are thinking “but what about interest rates and the dollar?”, recall that a central motive behind sovereign dollar reserve accumulation is to manipulate its value, and if that isn’t enough, look at what happened during the 1990s.) The false diagnosis of a savings shortfall is the mother of bad macropolicy.
6. Finally for the point most readers of this blog have been waiting for: this is a Council on Foreign Relations report, and it is framed by fears of what global imbalances imply for American power. The unstated assumption is that this power is benign, and that the world will be a worse place if Washington, DC is no longer its political-economic capital.
What can I say? Without harboring any illusions about the motives of our mega-creditors—China, Saudi Arabia, Russia—I would venture to suggest that no small amount of brutality and misery is purveyed by ours truly. Setser makes a big point of the financial clout of authoritarian regimes, but he gives no scrutiny to those he credits with “democratic values”. Maybe this is what it takes to get published by CFR, but readers should bear in mind that political values and practices are located on a spectrum, and the US is some distance from the democratic end. It is also a good idea to reread Thucydides, who understood that how a state respects its own citizens is one thing and how it exploits foreigners is another—although the differences have admittedly been shrinking in contemporary America, and in all the wrong ways.
2 comments:
Peter,
Maybe he is not doing it now, but Setser certainly in the past has noted links between capital inflows and bubblemania through long term interest rates being kept low, and hence housing mortgage rates.
While there is a lot of endogeneity to the savings rate, I think you overstate the lack of exogeneity of it. You emphasize some "propensity to buy imports" and then tout the role of the exchange rate. But, the dollar has been down, and while our exports have risen, US consumers have continued to buy a lot of imports, although admittedly much of that is oil. However, Americans have gotten into a high consumption mentality, documented my comparative systems book with Marina; we are just way ahead of everybody in consuming, having been encouraged by our political leaders to do so (remember Bush after 9/11? "Go shopping.") So, if people are buying lots of stuff, they will also buy lots of imported stuff.
I have been watching to see how Setser's appointment to CfR would tilt his commentary, and there does seem to be some of this going on now.
....but readers should bear in mind that political values and practices are located on a spectrum, and the US is some distance from the democratic end. It is also a good idea to reread Thucydides, who understood that how a state respects its own citizens is one thing and how it exploits foreigners is another...
Very apt. Most American writers and pseudonyms seem to be oblivious to this observation. Just as a similar problem occurs with the Australian variety.
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