Rather than leading rich-country savers to invest their money in poor countries out of greed, liberalization of capital flows has led poor-country savers to park their money in rich countries out of fear -- fear of political instability, macreconomic disturbances and deficient institutions, especially those that protect the rights of bondholders and minority shareholders.
Something may well happen in the next several years to radically boost the US' savings rate by making American households feel suddenly poor: tax increases, a real-estate crash, rapidly rising import prices caused by a plummeting dollar, a deep recession, or more than one of the above.
It would be nice to believe that when the tide of dollar-denominated securities ebbs, the flows of finance currently directed at the US will smoothly shift course and boost investment in Asia.
But don't count on it, especially considering the share of marginal investment in Asia that is aimed, one way or another, at exporting to the US market. Those outside America, especially in Asia, should regard the unstable state of the US macro-economy with grave concern.
As the seventeenth-century poet John Donne put it, "Ask not for whom the bell tolls -- it tolls for thee."
J. Bradford DeLong, professor of economics at the University of California at Berkeley, was assistant US treasury secretary during the Clinton administration.
copyright: project syndicate
RSS