"There are only two ways of telling the complete truth—anonymously and posthumously."Thomas Sowell

Monday, November 29, 2004

The Many Magnificent Wonders of the Current Account Deficit

Our favorite economist (and Reform Club coeditor), Alan Reynolds, has promised to write soon about Alan Greenspan's recent comments worrying about the current account deficit, and in the meantime he sends us the following brief note:

"Mr. Greenspan's assumed two-way link between current account deficit and the dollar bothers me most (aside from the stubbornly silly 'twin deficit' and 'hard landing' fables).

"In this story, the trade deficit makes the dollar go down, and the falling dollar then cures the trade deficit which, presumably, must make the dollar go back up -- thus causing a trade deficit which makes the dollar go down again, and so on. I once described this as voodoo economics in the Wall Street Journal.

"In the early '80s, however, Alan Greenspan and Marty Feldstein accused President Reagan of causing the current account deficit because budget deficits made the dollar (and interest rates) go UP! Now the same devilish budget deficit is said to make the dollar go DOWN. Up, down, who cares? The main thing is to fret and gripe about something. The solution, of course, is always the same -- higher taxes. Only the problems change."

We look forward to Alan's full analysis of the varying accounts of the causes and effects of the current account deficit.

No comments: