Levey Brown 1 The overstretch myth the U

Levey & Brown

1. The overstretch myth: • “the U S economy rests on an unsustainable accumulation of foreign debt … sudden unwillingness by investors abroad to continue adding to their already large dollar assets would set off a panic, causing the dollar to tank, interest rates to skyrocket, and the U S economy to descend into crisis, dragging the rest of the world with it. ”

U S hegemony is solidly grounded • The U S economy continually extends its lead in technology and innovation • The dollars role as the global monetary standard is not threatened • The risk to U S financial stability posed by large foreign liabilities is an exaggeration

2. The shift from the world’s largest creditor to world’s largest debtor has occurred. • The alarming trade imbalance mirrors premeltdown conditions of several past economies. • But, to compare emerging markets’ histories to a market of global hegemony is to compare apples and oranges.

3. (NIIP) Net International Investment Position should be deconstructed: • All other things equal, at the current level of current account deficit growth: NIIP would be negative 100% of U S GDP by 2010 • Things won’t remain equal, there will be – Future dollar depreciations – Market adjustment in interest rates – Market adjustment asset prices

4. Any way you look at the U S declining NIIP, it reflects strong fundamentals • The trade imbalance - a strong dollar and US structural import bias • An accounting identity – Investment needs savings and U S households continue to save at a negative rate.

But there are problems with national accounting of GDP • Capital gains on financial assets are counted as income (interest) • Gains on 401 K’s are deferred • Homeowners consider the homes as savings (appreciating physical assets) but are counted as Investment • The composition of global wealth – – the U S economy is expected to grow faster than Europe and Japan, – again an accounting identity: – Positive capital inflows create negative net exports

5. Foreign central banks • do not make purchases of U S federal deficit for the same reasons as private investors (rebuttal)

6. If U S stock prices and bond prices decline • U S investors would save at home rather than abroad