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Mr. Kircher—

I am not quite sure what happened, but you should be back on the RGE Doomsday cult blog aggregator.  RGE certainly does not intentionally try to screen out competing views—debate over the global economy is its bread and butter. Not that you need the publicity or site traffic given the love you get from Forbes!

Still, I hardly think pointing out that a 6.5% of GDP trade and transfers deficit is not sustainable off a 10% of GDP export base is complete doom mongering ... most people i think accept that something will need to give.  The debate is over the timing and nature of the adjustment.

Posted by .(JavaScript must be enabled to view this email address)  on  11/14  at  11:13 AM

Brad

Glad to hear that I will be back on at RGE. 

You are right in identifying the nature of the adjustment process as a key issue.  Here is what I said on this in a previous post:

“What sets cult members apart is their conviction that this ‘rebalancing’ process must be disorderly rather than smooth.  Those who think this process must be disorderly face the burden of explaining why markets are not already adequately pricing these risks.  It is not enough simply to claim that markets are irrational.  Some account of market inefficiency is required to explain this mispricing, particularly if these risks are as obvious as many claim.

Instead of relying on the standard cop out that markets are irrational, some cult members invoke the risk of an adverse shock that brings about a disorderly adjustment, including a flight of capital to countries with strong net international investment positions.  Such adverse shocks are always possible, but it seems strange to predicate a forecast on such an asymmetric view of the distribution of these shocks.  Positive shocks are just as likely, or at least, shocks that may be negative for non-USD asset markets.”

Posted by skirchner  on  11/14  at  12:42 PM

Mr. Kirchner (spelled correctly this time), or Stephen (probably not spelled correctly),

I generally don’t find discussions of why aren’t markets pricing these risks in all that rewarding.  If you believe that markets are perfectly efficient and rational, there is usually not much to discuss.  The discussion is only interesting if you think markets sometimes go to extremes, or focus on one thing (interest rate differentials) at the expenses of another (current account deficits) and that there focus can change rather suddently.  I come from the second tradition—i would note that the markets priced in very rapid growth in the revenues/ profits of internet companies in 2000, and did not price in much risk of an argentine default in say June 1998—or for that matter, not enough of a risk in mid 2000.

if you ask folks trading euro/ dollars or dollar/ korean won whether the market has priced in the adjustment required to stabilize US external debt at 60% of US GDP, they probably wouldn’t have much to say; if you ask them about interest rate differentials and the dollar in 06, they will have a lot to say.  fellow doomsday cult member Stephen Roach:

“The elasticity of globalization hardly provides a guaranty of immunity from macro shocks.  The final word from Lyford Cay came from another veteran who noted, “We all know these imbalances you speak of are unsustainable—we just can’t afford to focus on the endgame.”  Elasticity or complacency?  To me, it sounds more like the latter—and even more like denial.”

With respect to your last point, I would turn the question around.  The US on the external side has benefitted from a number of positive external shocks.  The euro/ dollar swing from 02-04 vastly increased the dollar value of US external assets.  Low interest rates kept interest payments on US external debt from rising.  Both combined to limit the fall in the US NIIP and the rise in the US current account deficit.  Asia opted not to let thier currencies fall againt the dollar during thir period, running up their reserves in the process, helping keep US rates low (those betting v. the BOJ/ MOF in 03/ early 04 lost) and spurring a housing boom.  And just when Asia was getting tired of financing the US, interest rate differentials swung in the dollars favor and petrodollars stepped in.  So given that lots of positive shocks that strike me as one offs are now “priced in” to US markets as permanent structural features of the world economy that assure the financing of large us external debt as low rates, i do think risks are biased in the other way ...

Posted by .(JavaScript must be enabled to view this email address)  on  11/15  at  05:11 AM