The United States as a whole consumes considerably more than it produces. The difference is the current account deficit, now at record levels. It’s linked to the federal budget deficit because net national saving (or dissaving) is household saving plus corporate retained earnings minus the deficit (or, during the final years of the Clinton Administration, plus the surplus). If net national saving is less than net private domestic investment, then someone abroad must be buying U.S. assets, whether real or finanacial.
Thus the consequence of huge current account deficits is that foreigners have larger and larger holdings of U.S. assets, including the tons and tons of Treasury securities being issued by Mr. Bush and his credit-card conservatives in their attempt to buy the forthcoming election with money the government doesn’t have.
Even if foreigners remain willing to hold our debt, the current account deficit, along with the unspectacular rate of private-sector saving, means that the country as a whole isn’t laying away the nest egg it will need when the baby boomers start to retire. (Recall that the $500 billion deficit the President [falsely] promises to cut in half is on top of the expenditure of the entire Social Security surplus, once allegedly “locked away.”)
But it’s possible that foreigners will decide that current U.S. policies are unsustainable, and will start selling dollar-denominated assets, starting with those Treasuries. The result could be a crisis resumbling Argentina’s. Robert Rubin, who — correctly — predicted that a credible policy of fiscal restraint would push interest rates down, is now concerned that the current policy of incredible profligacy might lead to such a crisis, and has said so in chaste academic prose with two equally respectable co-authors, Peter Orszag and Allen Sinai.
Currency crises are unpredictable, so no one with any sense is claiming that one will come by any particular date, but by the same token no one can reasonably promise, given that the fundamentals for such a crisis are there, that one will not happen by any particular date: before November of this year, for example.
The prospect of a crashing dollar accompanied by soaring interest rates and a credit crunch leading to a sharp contraction of business activity has the credit-card conservatives terrified. Since they are unwilling to change the fundmantal factors that create the risk in the first place, they need to ensure, or at least try to ensure, that if it happens the blame will not fall on Mr. Bush and his accomplices.
If it’s not the President’s fault that the dollar might soon go the way of the bhat, whose is it, then? Why, the fault of the currency speculators, of course. And if one of them happens to be a prominent liberal Jew, why, so much the better! (Don’t mention his religion, of course. That would be vulgar, and unnecessary. Just wink and refer to this Holocaust survivor as “Hungarian-born.”) And once you’re at it, why not throw in Rubin, also Jewish, for good measure? Suggest that his restrained exegisis of the problem is an attempt to “talk the dollar down,” as he previously “talked it up,” without pausing to notice that his previous talking was backed by the requisite action.
It will surprise no one that Donald Luskin has decided to lend his discredited name to this vicious libel, or that Insight magazine, the sister publication of the Washington Times, has published it. I would not intrude it on your thoughts, dear reader, except that it gives us a good hint about what the coming campaign will be like, and demonstrates that fear of a currency crisis is by no means confined to political opponents of the current administration.
Oh, and one other thing: While neither Mr. Soros nor Mr. Rubin has either the capacity or the inclination to wreck the U.S. economy, the Chinese government, holding something like a quarter of a trillion dollars in dollar-denominated debt (about half of it from the Treasury) certainly does have the capacity to do so. At the moment, China lacks the inclination, but in a crisis over, say, a confrontation between the mainland and Taiwan, it might find good use for such a terrible threat. So credit-card conservatism, in addition to all its other faults, is really truly awful national-security policy.
Just thought I’d mention it.