Tuesday, March 06, 2007


Bloomberg's Tom Keene stewarded a nice interview with the eminent Dr. William Cline, now Senior Fellow of the Peterson Institute for International Economics, and whose textbook on International Monetary Policy, incidentally, was cornerstone of my course work on the subject in the early 1980s.

His main points (though nothing new), were nice to hear as they were realyed in the most sober and un-hysterical of terms:

* The current path of US deficits is clearly unsustainable. If left uchecked. modelling US ratio of debt to GDP will tend towards 140% in the following decade. It needs to stabilize at nearer to 50% to have any chance of intermediate term sustainability.

* This will necessarily require a cut in the CA deficit, to at least 3% of GDP from current 7% levels.

* In the modelling the policy outcomes required to get there, the US will also need flatten the fiscal gap to zero, perhaps even running a mild fiscal surplus, from currently yawning levels.

How does th US achieve these goals?

* Reversing Bush tax cuts will only get the US fiscal gaps to the -2 to -3% level, though mounting intergenerational liabilities will require further fiscal action and measures on reveues, spending, or both.

* USD must continue to depreciate on the order of another 15 - 20%. Asian nations, in general, must allow their currencies to rise. Japanese YEN should be in the vicinity of 90; and the RmB too, should be substantially higher. I could detect (like my own opinion) a rather scathing tone towards Japanese intransigence YEN appreciation.

* To avoid a meaningfully hard and rapid crisis-induced adjustment, participants probably should enact and abide by a new Plaza-like Accord whereby participants agree NOT to intervene in FX markets; NOT to accumulate reserves for mercantile advantage; and let the markets tend towards natural adjustment. Failure to due so will inevitably spawn more a meaningful adjustment crisis.

* He was rather disturbed by the fact that current adjustment requirements (even today) are more demanding than historical ones, YET policy-makers remain sanguine, and wholly unmotivated to seek multilateral solutions.

I would add, almost needless to say, that all plausible solutions are contractionary, whether undertaken sooner or later. The earlier they are implemented, the more likely that recovery benefits from a lower currency and lower rates will feed through to cushion the overdue adjustment.


Anonymous said...

Do you have a link for that interview? I couldn't find it with a search on both Google news and the Bloomberg website. Thanks.

Aaron Krowne said...

US debt burden is already 100%:

- bona-fide external Federal debt is ~$4.5trillion
- internal "Federal government IOU debt" is another $4.5 trillion
- aggregate state debt is at least $2 trillion
- the national product is actually around $11-12 trillion (lower than the GDP because the GDP counts national borrowing as product!)

That gives $11 trillion to $11-12 trillion of product. Oops!

"Cassandra" said...


Here is the link. Dr Cline is one of the most levelheaded observers ou there.


The debate I would like see is the one pitting IS's David Roche v. Prof MacKinnon.

Aaron Krowne said...

Of course, most liabilities are "off balance sheet" -- hence the $55 trillion GAO estimate of entitlements debt. Also there is the gigantic private household debt burden, much of which represents the same sort of national liability government services would.

Anonymous said...

Too bad that grownups are not in charge of any of the major governments, isn't it? And the children with the dirty hands and a love of sweets are not about to contract anything voluntarily. I'm just laying in a permanent bet on sudden and painful changes in the financial markets, and letting that ride for a while. OldVet

Anonymous said...


Your dear Wizard of USD says....

"China's ``underdeveloped'' financial system provides savers with an average return of 2.5 percent on bank deposits of about $2 trillion, Paulson said.

`Inadequate Reward'

Compounded over 30 years, that $2 trillion becomes about $4 trillion, Paulson said. If the financial system paid 8 percent on those savings, the money would swell to about $20 trillion, Paulson said.

``Inadequate reward to savings hurts the Chinese people,'' Paulson said. ``While China's people work every bit as hard, if not harder, than people in other economies, they are not as well off.''

Mmmm nothing about deposit rates in Japan and US??

But FT notes:

"Because more than 8m baby-boomers, due to receive an estimated Y50,000bn in lump sum benefits, will retire in the next three years, it expects those flows to accelerate.

Japanese interest rates are still only 0.5 per cent following last month’s 0.25 per cent rate increase"

So lets "do the math" on the additional over and above the 6trln USD held at 0.5% now...lets say at 3.5% = 195 bn = 4% of Japan's GDP... Obviously if we are to compond then it can't be spent.