Friday, November 19, 2004

Greenspan

Alan is rational! Or at least aware of basic economics: massive current account deficits cause a currency to lose value. He is mostly right to say that an intervention isn't ideal: laissez-faire has to prevail and attempts to prop up a massively overvalued currency have tended to end badly (see, well, developing countries in the early 1980s, developed world in 1973, England in 1992...). The article says, however that
analysts did not interpret Mr. Greenspan's remarks as a rebuke of the White House, which has indicated it will seek to make the deep tax cuts of its first term permanent. If anything, they said, his speech had a laissez-faire tone - leaving events in the hands of the market.

As always, we wonder who these "analysts" are. It is worrying if this is true, because it implies that the Administration has no intent of trying to close the budget deficit. A problematic thing. For a falling currency can close the trade deficit by making imports more expensive and making exports cheaper, reducing imports and increasing exports. But that does not close the budget deficit, so we will still have a fundamental overhang. And it is unclear how this is supposed to be resolved by the market -- unless the Administration would welcome some sort of mass exodus of capital from the country, a very bad thing. So Greenspan's logic is only half consistent: the trade deficit could be resolved by the market, and it wouldn't necessarily be the most terrible thing for us, although it would screw the economies that export to us; but something has to be done about the budget deficit or else things do not look happy. Yet the administration is obviously intent on remaining oblivious to this danger: when budget deficits are a big problem, making tax cuts permanent is the thing to do.

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