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Richmans' Trade and Taxes Blog
Double the Dip?
Nouriel Roubini's column in today's Financial Times presents a dark picture of the world economic situation. Roubini notes the diminishing leverage available to policy makers and central banks the west, and signs of slowing economic growth and economic contraction.
Roubini calls for the following actions:
1. short term economic stimulous from western countries that retain access to credit markets (including the US).
2. more quantitative easing by central banks.
3. aggressive restructuring of mortgage debt and bank balance sheets.
Roubini acknowledges, however, that all of these are more difficult to do now than two or three years ago. He concludes that preventing a severe recession may be impossible, but preventing a depression could still be feasible if the appropriate policies are enacted.
Roubini does not discuss measures to balance trade. But the next round of the crisis which is now coming is closely linked to the world's out-of-balance trade conditions. How the world emerges from this crisis depends very much on how trade is dealt with.
In a recent post Michael Petis writes on EconoMonitor concerning the criticisms made by China and Germany concerning the credit-worthyness of their trading partners, and the ways that the current crisis can end. He is spot on.
Whichever argument you think is the more just – that the imbalances are mainly the fault of the US or the fault of China – since the Chinese accumulation of US Treasury bonds was the automatic consequence of Chinese policies that the US opposed, it seems a little strange that the US should feel any strong obligation to maintain the value of the PBoC’s portfolio. That is not to say that the US should not be concerned about inflation and the value of the dollar – only that the reasons for its concern should be wholly domestic.
Petis reviews previous mechanisms for current account adjustment -- the role of gold and silver as reserve assets, and the ways in which colonialism and the discovery of America temporarly relaxed what were otherwise fairly strong constraints pulling trade towards balance. These constraints are no longer in place, Petis argues, leaving a few unpalatable options.
In today’s world things are different. There is no adjustment mechanism – specie flow or imperialism – that permits or prevents persistent current account imbalances...
That leaves the other two outcomes. First, once Spanish debt levels become worryingly large Germany and Spain can reverse the policies that led to the large trade imbalances. In that case Germany will begin to run a current account deficit and Spain a current account surplus. In this way German capital flows to Spain can be reversed as Spain pays down those claims with its own current account surplus. Neither side loses.
Second, Spain can take steps to erode the value of those claims in real terms. It can do this by devaluing its currency, by inflating away the value of its external debt, by defaulting on its debt and repaying only a fraction of its original value, by expropriating German assets, or by a combination of these steps.
It is pretty clear that the countries of the world represented in my example by Germany (Germany, China, Japan, etc.) are doing everything possible to resist the first option.
We have been arguing on this blog, in op-eds, and in our book for the last ten years that the United States must take strong actions (e.g. import certificates or scaled tariffs) to force the exporters to accept more balanced trade. So far we have not been listened to by policymakers in either party. If we do not force trade towards balance, then the approaching hard landing will come with default, debt, and relative poverty. It is long past time for the United States and other countries being bankrupted by trade deficits to demand balanced trade through import certificates or scaled tariffs.
Comment by Raymond Richman, 8/9/2011:
I agree totally with my colleague's argument that balancing foreign trade is important not only for the U.S. but many countries. The future of the Euro depends on Greece, Italy, Portugal, Spain, and Ireland getting their trade in balance. And the U.S. must get its trade in blance or private investment in manufacturing will never be attracted and the U.S. will decline or at best stagnate. Where I disagree with Jesse is his suggestion that trade be balanced with import certificates. Who is to get the import certificates? Are they to be auctioned off and what rules and what bureaucracy will need to be created to administer the process? We do not need another bureaucracy. Our invention of the single-country-scaled- tariff is the only market solution to the problem. The tariff rates will rise and fall automatically, rising as our trade balance worsens and falling as it is reduced. No bureaucracy would be necessary. We believe that under WTO rules, any country with chronice trade imbalances would be entitled to use the scaled tariffs.
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