from Follow the Money

Martin Feldstein joins the dollar doomsday cult

January 9, 2006

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Stephen Kirchner take note. 

Alan Greenspan, too.  Dr. Feldstein thinks central banks -- and oil sheiks -- are behind a lot of private flows into the US.  And he doesn't seem convinced that this is will result in a stable equilibrium.  Not getting the Fed job does liberate one's oped pen.

No surprise, Dr. Feldstein's oped was music to my ears.  Not because he believes that a large fall in the dollar is needed to correct the current account deficit.  That is widely accepted, though the timing of the fall is fiercely debated.  But because it sometimes feels a bit lonely railing against the data that showed a huge surge in private inflows to the US in 2005.   That data never made much sense.  It doesn't show any flows from the oil exporters, and a country whose state owned oil company pumps oil for as little as $2 a barrel and sells it as $50 or $60 clearly has lots of cash to invest somewhere.  The fall off in central bank inflows into the US was a bit strange as well, given that there has not been a comparable falloff in global reserve accumulation.   It is nice to have some of the arguments I have made backed by someone on the short-list to replace Alan Greenspan.

I also would not underestimate the extent to which Dr. Feldstein's argument directly challenges some ideas central to Alan Greenspan's recent analysis of the US economy. 

Greenspan is known for looking for missing variables that help to explain otherwise puzzling data, and recently, he has been interested in globalization, and specifically financial globalization.  Greg Ip's article in Monday's Wall Street Journal : "His [Greenspan's] conclusion was that the US can run large deficits with trading partners because investors have become less sensitive to international borders in deciding where to put their money."

The argument that market-driven financial globalization has erased old limits that forced countries to finance investment with national savings has deep resonance to Greenspan.   But not for Dr. Feldstein.  Feldstein and Horioka, after all, discovered the close historic correlation between national investment and national savings.  Feldstein's willingness to argue that the hidden hand of the state, not the invisible hand of Greenspan's global market, explains the United States' ability to finance its large external deficits at low rates consequently does not come out the blue.

I discussed Feldstein's take on financial globalization in more depth before Christmas, so I don't say more now.    Suffice to say that Feldstein seems to think central bank intervention is the missing variable in Greenspan's analysis of financial globalization.

Update: No FT subscription, then visit Mark Thoma.  You might even want to visit if you have an FT subscription.

Editor's note: I added most of the analysis to this post a couple of hours after I first linked to Dr. Feldstein's article.  I did not change any of the initial content.

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