Paul Blustein and Deficits 101

Paul Blustein is one my favorite Finance journalists. In an earlier post, I raved about his books on the IMF and Argentina, both exceptionally written.

His day job is with the Washington Post and he has a recent series of must-read articles (for those wanting to understand World Trade). So for our readers who have time over the holidays, dive in and enjoy. If you like the links, go read his books!

Excellent discussion of the US Trade and Budget Deficits
I think there's pretty broad agreement among economists on both the right and left about what ought to be done. First of all, the U.S. needs to increase its savings--and since we've never succeeded at getting individual Americans to save more (though IRA's and so forth), that basically means reducing DISsaving. And the biggest dissaver of all is the U.S. government, through its budget deficit. Now, how you cut the budget deficit is something I am DEFINITELY not supposed to comment on.

Second, Asian countries need to raise the value of their currencies. If China un-pegged its yuan from the dollar and let the yuan rise, that would almost certainly cause other Asian currencies to rise too. Then Asians would have more purchasing power on world markets, and they would probably import more--that would also help to balance transpacific trade.

Third, Europe needs to take steps to increase its growth, so that Europeans would import more too. But Europe is a far smaller part of the global imbalance problem than is Asia.

U.S. Trade Deficit Hangs In a Delicate Imbalance
In contrast with the United States, where the personal savings rate recently has sunk into negative territory -- with people spending more than their income -- South Korea's personal savings rate is about 7 percent, and its national savings rate of 33 percent ranks among the highest in the world. The rate reflects the thrift not only of individuals but also of government and business; the South Korean government has run budget surpluses in recent years, so it need not borrow large sums as the U.S. government must.

As U.S. Trade Gap Grows, So Do Asian Banks' Foreign Reserves
"While central banks care less than private investors about the return on their investments, they're not completely clueless," said economist Nouriel Roubini of New York University. "At some point, they have to consider the severe losses they could suffer" from a big decline in the dollar. China provides a striking example; if its currency rose 20 percent against the dollar, the nation's central bank would lose well over $100 billion on its holdings of U.S. securities.

And then there are the political implications of central banks such as China's or Russia's holding so many U.S. securities. "The ability to send a 'sell' order that roils markets may not give China a veto over U.S. foreign policy, but it surely does increase the cost of any U.S. policy that China opposes," Roubini wrote recently with his colleague Brad Setser in the journal Foreign Affairs.