A Great Question from John Cochrane
Since when is every trade surplus or deficit an "external imbalance" in need of correction?as he poses here.
Do these and similar stories exactly account for current trade patterns? I don't know. But nobody else does, either. In particular, the army of economists in the basements of the International Monetary Fund (IMF) has no clue exactly how much each country should be saving, or where the best untapped global investment opportunities are around the world—including whether trade patterns are "normal" or "imbalanced."And I agree totally with this paragraph:
What's the right policy toward China? They put a few trillion dollars worth of stuff on boats and sent it to us in exchange for U.S. government bonds. Those bonds lost a lot of value when the dollar fell relative to the euro and other currencies. Then they put more stuff on boats and took in ever more dubious debt in exchange. We're in the process of devaluing again. The Chinese government's accumulation of U.S. debt represents a tragic investment decision, not a currency-manipulation effort. The right policy is flowers and chocolates, or at least a polite thank-you note.and to finish (giggle)
Yet Mr. Geithner thinks that the Chinese somehow hurt us. There is at work here a strange marriage of Keynesianism and mercantilism—the view that U.S. consumers supported the world economy by spending beyond our means, so that other people could have the pleasure of sending things in exchange for pieces of paper.Guy must be from Chicago.
This is all as fuzzy as it seems. Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find "imbalances," properly diagnose "overvalued" exchange rates, then "coordinate" structural, fiscal and exchange rate policies to "facilitate an orderly rebalancing of global demand," especially using "medium-term targets" rather than concrete actions. The German economics minister, Rainer Brüderle, called this "planned economy thinking." He was being generous. Planners have a clearer idea of what they are doing.
h/t Streetwise Professor, who adds (sounding somewhat Chicagoan):
It drives me crazy (short trip, I know) to hear “analyses” of Keynesian-style stimulus policies that are predicated on the belief that Americans are programmed automatons, rather than deciding, active, acting, and reacting, agents. They want to restore their ravaged balance sheets, and do so by saving. They understand, perhaps not intellectually, quoting Ricardo, but certainly intuitively, that expanded government spending today is nothing but tomorrow’s tax bill. So they react to stimulus, and threats of more stimulus (and “threat” not “promise” is the right word), by making decisions that largely reverse government actions. Maybe not 100 percent, but substantially. Which means that the fact that stimulus has not stimulated shouldn’t be surprising to anybody who understands that American households are not inert blobs that can be manipulated at will by Washington mandarins. (I understand that excludes a good fraction of the 202 area code and vast swathes of the commentariat.)The Canadian version of this sort of hand-wringing is usually over the exchange rate of the Canadian dollar.