Brad Setser writes:
RGE - Read Barry Eichengreen: Eichengreen provides the best summary I have seen of competing views on the sustainability of large US trade deficits, along with the impact of sustained trade deficits on US external debt and the investment income balance He leans towards what he calls the standard view: what cannot go on forever, won't go on forever. But he also clearly explains competing views, whether the "New Economy and Higher productivity make it all OK" view of Richard Cooper (and Michael Mandel), the"Savvy investor" view of John Kitchin (Cavallo and Tille have a similar argument) or the US isn't really in debt because of dark matter view of Hausmann and Sturzenegger and their various acolytes in the investment world.
Well worth reading. And Martin Feldstein is worth watching. He seems to subscribe to mainstream view. He certainly thinks the dollar needs to fall.
But how come Brad Setser knows more about what is being written in the office next door to mine than I do? :-) I hadn't heard of this. (I do, however, recommend the excellent John Kitchin.)
Barry's bottom line:
[U]ncertainty about whether a disorderly correction is imminent does not justify inaction. That a Category 5 hurricane strikes only once a generation does not absolve the responsible homeowner, living in a flood plain, from putting his house on stilts or investing in flood insurance. For the United States, insuring against a disorderly correction would involve progressively tightening fiscal policy and thus gradually narrowing the gap between absorption and production. The best way for China and other East Asian countries that export to the United States to meet this deceleration in U.S. absorption growth would be by loosening fiscal policy (increasing spending on social security, health care, education, rural infrastructure and the like) and thus stimulating demand at home. With demand growth slowing in the United States and accelerating in Asia, relative prices, in the form of the dollar exchange rate, will tend to adjust. The argument for gradual adjustment starting now to limit the risk of a sharp, disruptive adjustment later is still sound even if an eventual hard landing is less than certain.