« The Value of Writing for the General Public | Main | We'll Be Watching You »

Monday, April 24, 2006

Money Talks: Our Financial Future?

Paul Krugman responds to comments on his latest column:

Money Talks: Our Financial Future? The Prognosis Is Grim: Readers respond to Paul Krugman's Apr. 24 column, "CSI: Trade Deficit"

Tim Keese, Frankfurt, Germany: Income on foreign investments is accumulative, isn't it? Americans are receiving income on investments in foreign countries made decades ago, and the U.S. current account deficit is relatively new — meaning returns to foreign investors would naturally be lower, but still growing. You have to look at total investments, not just current ones. Or am I missing something here?

Paul Krugman: We've been running a current account deficit consistently since about 1980. And back in the day, when the U.S. ran surpluses, they were small compared with the size of the economy. On the other hand, the deficits since 1999 have been huge. By any measure, we're deep in the red now (the official figures say that our net debt is close to $3 trillion) — unless you believe that the current account deficits of recent years are a statistical illusion.

Jan Beckedorff, Bethesda, Md.: Please follow up with scenarios of what may happen when the chickens do come home to roost. What will be warning signs? How to defend savings and assets for those not in the wealth class? ...

Paul Krugman: The chickens-home-to-roost scenario is actually the hard part, because we have no experience with a country this big and this rich being this deep in deficit. One thing is clear, though: it's really bad for housing.

Donna Middlehurst, Chevy Chase, Md.: I'd like to see a companion analysis of the issue of why we're not paying for those budget deficits yet ... Republicans screamed for so many years about the evils of deficit spending. They're strangely silent, but there's also no rattling of the windows to signal an approaching hurricane....

Alan Soffin, Doylestown, Penn.: ...You just sketched in the trade deficit as a standing condition, but this reader is not sated. How did we get here? What forces or ideas generated this predicament? Even a hint or two would help.

Paul Krugman: I and many other economists are working on that! What seems to have happened is a mixture of several causes. Developing countries in Asia starting building up their dollar reserves after the 1997-1998 crisis; this helped cause low interest rates in the U.S., which started a housing bubble, which led to a sharp decline in U.S. saving, reinforced by the budget deficit, and so on. I'll try to write more about it in the near future; let's see what my Princeton colleagues have to say in today's seminar.

Fred Roper, Spencer, Okla.: ...The United States ... has a net surplus in trade in services, the last time I checked. Therefore, the U.S. has a negative in the trade in goods, but a surplus in trade in services and investments. What is the net result of the three put together? ... I would think that with the income the U.S. generates from services and investments that the trade deficit does not tell the whole story of what creates wealth for a country.

Paul Krugman: Last year, the U.S. did run a surplus in services, but it was only $57 billion, compared with a deficit in goods of $780 billion. And we also ran a substantial deficit in "unilateral transfers," which includes things like money that immigrant workers send home. The current account deficit, which includes all of this (and the income from US companies abroad, too) was $805 billion. Sorry, there's no comfort in the broader numbers.

For those who want to look at the numbers for themselves, a couple of sources:

    Posted by on Monday, April 24, 2006 at 01:19 PM in Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (15)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference Money Talks: Our Financial Future?:


    Feed You can follow this conversation by subscribing to the comment feed for this post.