real costs of adjustment
[Carl Remick sent me this query offlist but I think it’s of general
interest.]
On Sep 15, 2007, at 2:35 PM, Carl Remick wrote:
Doug, does that nececessarily mean increased investment to “reindustrialize,” as you said — which I read as meaning more goods producton — or could Bernanke just mean more services trade (”invisibles” like financial services, etc.)? Or realistically speaking, is there no way services trade could do much to shrink the current account deficit?
Here’s the full paragrah:
Second, the large U.S. current account deficit cannot persist
indefinitely because the ability of the United States to make debt
service payments and the willingness of foreigners to hold U.S.
assets in their portfolios are both limited. Adjustment must
eventually take place, and the process of adjustment will have both
real and financial consequences. For example, in the United
States, the growth of export-oriented sectors such as manufacturing
has been restrained by the shifts in relative prices and foreign
demand associated with the U.S. trade deficit. Ultimately, the
necessary reduction in the trade and current account deficits will
entail shifting resources out of sectors producing nontraded goods
and services to those producing tradables. The greater the needed
adjustment, the more potentially disruptive and costly these shifts
may be. Similarly, external adjustment for China and other surplus
countries will involve shifting resources out of the export sector
and into industries geared toward meeting domestic consumption
needs; that necessary shift, too, will likely be less disruptive if
it occurs earlier and thus less rapidly and on a smaller scale.
So I think he means that manufacturing investment is necessary to
balance the international books. He’s right - we could double the
services surplus and it would be little more than bupkes. When he
says “real and financial consequences” it says to me that he’s
thinking that some of the buckets of cash that corps have been
shoveling into the markets will have to go into physical investment
instead. Wall Street is not hearing this message.
Doug