Good piece by Marshall at Credit Writedowns on the trouble with imbalance fetishists out there. As he rightly points out, there are some who are over-obsessing about getting to zero imbalances, not recognizing that stable capitalism is a contradiction in terms.
That is not to say the threat of foreign investors dumping US assets isn’t a danger, but it may not be the central risk, which as far as I can see remains the concerns of people who fret about today’s imbalances. To me, the central risk is that the US private sector is shifting to a net saving position in a dramatic way for the obvious reasons – loss of wealth, precautionary saving given recession, etc. Arguably, this needs to happen if households are going to pay down debt and reduce debt burdens, and if they are realizing capital gains are not guaranteed.
The risk of this necessary adjustment arises because if the private sector moves to a net saving position – spending less than it earns – the income level in the US will fall unless the trade deficit turns quickly enough, and unless the fiscal deficit expands commensurately. In other words, we should be applauding this increased fiscal deficit because the alternative would be disastrous, not just for the US, but the world as a whole.
For every net saver, there must be a net deficit spender, or else the net saving cannot be accomplished without an adjustment of incomes. This is where the so called paradox of thrift comes from, as you well know. If incomes fall, debt defaults and delinquencies will increase more dramatically, and there is a good chance of heading into a debt deflation spiral, a la Irving Fisher.
More here.
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