It seems to me much more likely that the US stock market will not be
brought down by a loss of confidence in the US economy or worries about
the unsustainability of the current account deficit but rather by a
sell off of US securities by the Japanese banking system in desperate need
to recapitalize in accordance with Basel requirements. The recent merger
wave in the Japanese banking system may have done little to
write off non performing assets; indeed they may have been only better
hidden and carried over. The time bomb is still ticking. It seems to me
that the focus on the weakness of the US is misplaced. If Japan sells off
US securities it will not be due to a loss of confidence in the US but a
breakdown in its banking system. My daily cursory reading of the WSJ
suggests to me that this is the much greater threat presently.
> Paul seems to suggest that, if the foreign capital is being invested, then
> this is sustainable (presumably because the investment will generate the
> profits with which to make the interest payments in the future). So,
> according to Paul's criterion, this inflow of foreign capital seems to be
> sustainable, since it seems to be true that at least a significant portion
> of this foreign capital is indeed invested.
> But the problem is that, since the current account deficit will continue
> to increase in the years ahead, the net inflow of foreign capital will
> also have to continue to increase (or the dollar will have to decline).
> And a vicious circle has set in that will probably increase the current
> account deficit significantly in the years ahead (without a decline of the
> dollar or a US recession): this year's increase in the current account
> deficit further increases the foreign debt, which next year will increase
> the foreign interest payments and hence the current account deficit still
> further, etc., etc.
> Wynne Godley (of the Levy Institute) has estimated in a recent paper
> "Seven Unsustainable Balances") that, if the US economy were to continue
> to grow 2% a year for the next five years, then the US foreign debt as a
> percentage of US GDP would more than double from roughly 12% today to
> roughly 25% in 2003. And by this time, the vicious circle described above
> would be so firmly entrenched that the foreign debt would escalate even
> faster after that - reaching 45% of GDP by 2008. Godley concludes: "This
> process is clearly unsustainable and will eventually have to be checked,
> preferrably before an exchange rate crisis forces the issue."
> I think that at some point in the not too distant future, if a US
> recession does not happen first, foreign investors will begin to see that
> the dollar will have to decline eventually in order to reduce this
> escalating current account deficit, and they will be less willing to
> provide the foreign capital necessary to avoid a devaluation of the
> dollar. At this point, the dollar will start to decline more rapidly,
> more foreign capital will flee, and we will end up with a substantial
> devaluation of the dollar. This devaluation of the dollar will, in turn,
> cause the stock market to crash, and with it consumer spending and the US
> economy in general, as I have already discussed.
> Paul (and others): what do you think?
This archive was generated by hypermail 2b29 : Sun Feb 27 2000 - 15:27:08 EST