Roubini Gives Geithner some props

On his way to Davos Nouriel Roubini comes through with an excellent post:

And Geithner gave the most interesting speech at the conference, a keynote address that was remarkable for his concerns about the sustainability of the US current account deficits. While Bernanke blames these deficits on forces external to the US - a global savings glut - Geithner reminded us that these imbalances have also to do with US domestic imbalances, i.e. the US structural fiscal deficits that need to be reduced in order to reduce the risk of a disorderly rebalancing.

Geithner also listed five arguments that have been advanced by many to argue that US current account deficits are sustainable; but then, one by one, he refuted each of these arguments. First, even if the imbalances are partly due to a savings glut it would not be prudent for the US to run such deficits for a long time. Second, the argument that deficits are optimal if the result of private sector savings and investment decisions is refuted by the evidence that the US deficit has been recently the result of fiscal deficits and financed with the accumulation of public debt. Third, deficits may be due to Bretton Woods 2 effects but this regime is not consistent with the domestic balance of these countries (i.e. implicitly he was saying: watch out China about the financial imbalances of accumulating reserves and keeping the currency weak). Fourth, past adjustments of current account imbalances have not been that orderly as investment and growth fell in many. Fifth, dark matter a' la Hausmann and Sturzenegger will not save the US as the net factor income balance is rapidly going into negative territory.

It was the most clear, intelligent and thoughtful analysis made by a Fed official on why we should worry about the US current account deficit and its potential disorderly rebalancing. A really impressive and honest intellectual discussion of serious policy issues. He also correctly argued that if the U.S. fixes its domestic problems that lead to the deficit, i.e. the fiscal deficit, the US will be in stronger position to be tell China and other BW2 countries that they should do their fair share of the global adjustment.

Compared to Geithner, the other officials at the conference were quite blase' about global imbalances or altogether ignored them. The Chinese central bank deputy governor and now head of their Ex-Im bank Li Ruogu gave a speech about the imbalances in the international financial order where he did not even mention the term global current account imbalances. And he argued that exchange rate stability is necessary not only for China but also for all major currencies (sic!). The Bank of Japan Deputy Governor Hirano hid behind the arguments that the Japanese current account surplus has been shrinking as a share of Japanese GDP; he also argued that population aging in Japan would lead to a fall in the savings rate and, thus, a current account surplus shrinking. In other terms, Japan does not need to do anything, currency-wise or policy-wise to contribute to global rebalancing.

The rest of the post is chock-full of links and insights, definitely worth a read.