ClineSpeak

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.