I recently learned something interesting: US international finance economists and domestically oriented macroeconomists have very different -- indeed, opposing -- views of the likely consequences of the US' huge current-account deficit.
International finance economists see a financial crisis as likely, followed by a painful and perhaps prolonged recession in the US. Domestically oriented macroeconomists, by contrast, see a forthcoming fall in the value of the dollar not as a crisis, but as an opportunity to accelerate growth.
Domestically oriented macroeconomists look at the situation roughly like this: At some point in the future, foreign central banks will become less willing to continue buying massive amounts of dollar-denominated securities in order to prop up the greenback. When they cease their large-scale dollar-purchase programs, the value of the dollar will fall -- and it will fall hard.
But, according to this view, as the dollar's value declines, US exports will become more attractive to foreigners and US employment will rise, with labor re-allocated to the newly-vibrant export sector. It will be like what happened in the UK after it abandoned its exchange-rate peg and allowed the pound to depreciate relative to the Deutschmark, or what happened in the US in the late 1980s, when the dollar depreciated against the pound, the Deutschmark, and -- most importantly -- the Japanese yen.
International finance economists see a far bleaker future. They see the end of large-scale dollar-purchase programs by central banks leading not only to a decline in the dollar, but also to a spike in US long-term interest rates, which will curb consumption spending immediately and throttle investment spending after only a short lag.
To be sure, international finance economists also see US exports benefiting as the value of the dollar declines, but the lags in demand are such that the export boost will come a year or two after the decline in consumption and investment spending. Eight million to 10 million people will have to shift employment from services and construction into exports and import-competing goods, implying that structural unemployment will rise.
Moreover, there may be a financial panic: Large financial institutions with short-term liabilities and long-term assets will have a difficult time weathering a large rise in long-term dollar-denominated interest rates. This mismatch can cause financial stress and bankruptcy just as easily as banks' local-currency assets and dollar liabilities caused stress and bankruptcy in the Mexican and East Asian crises of the 1990s and in the Argentinean crisis of this decade.
When international finance economists sketch this scenario, domestically oriented macroeconomists respond that it sounds like a case of incompetent monetary policy. Why should the Federal Reserve allow long-term interest rates to spike just because other central banks have ceased their dollar-purchase programs? Should not the Fed step in and replace them with its own purchases of long-term US Treasury bonds, thereby keeping long-term interest rates at a level conducive to full employment?
To this, international finance economists respond that the Fed does not have the power to do so. When forced to choose between full employment and price stability, the international finance economists say that the Fed will choose price stability, because its institutional memory of the 1970s, when inflation ran rampant, remains very strong. Therefore, since a fall in the value of the dollar raises import prices and thus functions as a negative shock to the supply side of the economy, the Fed will have to raise, not lower, interest rates, and sell, not buy, bonds.
Serious economists whom I respect enormously find themselves taking strong positions on opposite sides of this debate. I'm not wise enough to say which side is right, but I certainly know which side I hope is wrong.
J. Bradford DeLong, professor of Economics at the University of California at Berkeley, was Assistant US Treasury Secretary during the administration of former US president Bill Clinton.
Copyright: Project Syndicate
A series of strong earthquakes in Hualien County not only caused severe damage in Taiwan, but also revealed that China’s power has permeated everywhere. A Taiwanese woman posted on the Internet that she found clips of the earthquake — which were recorded by the security camera in her home — on the Chinese social media platform Xiaohongshu. It is spine-chilling that the problem might be because the security camera was manufactured in China. China has widely collected information, infringed upon public privacy and raised information security threats through various social media platforms, as well as telecommunication and security equipment. Several former TikTok employees revealed
Two sets of economic data released last week by the Directorate-General of Budget, Accounting and Statistics (DGBAS) have drawn mixed reactions from the public: One on the nation’s economic performance in the first quarter of the year and the other on Taiwan’s household wealth distribution in 2021. GDP growth for the first quarter was faster than expected, at 6.51 percent year-on-year, an acceleration from the previous quarter’s 4.93 percent and higher than the agency’s February estimate of 5.92 percent. It was also the highest growth since the second quarter of 2021, when the economy expanded 8.07 percent, DGBAS data showed. The growth
At the same time as more than 30 military aircraft were detected near Taiwan — one of the highest daily incursions this year — with some flying as close as 37 nautical miles (69kms) from the northern city of Keelung, China announced a limited and selected relaxation of restrictions on Taiwanese agricultural exports and tourism, upon receiving a Chinese Nationalist Party (KMT) delegation led by KMT legislative caucus whip Fu Kun-chi (傅崑萁). This demonstrates the two-faced gimmick of China’s “united front” strategy. Despite the strongest earthquake to hit the nation in 25 years striking Hualien on April 3, which caused
In the 2022 book Danger Zone: The Coming Conflict with China, academics Hal Brands and Michael Beckley warned, against conventional wisdom, that it was not a rising China that the US and its allies had to fear, but a declining China. This is because “peaking powers” — nations at the peak of their relative power and staring over the precipice of decline — are particularly dangerous, as they might believe they only have a narrow window of opportunity to grab what they can before decline sets in, they said. The tailwinds that propelled China’s spectacular economic rise over the past