Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, January 26, 2005

I Am a Closet Austrian

I am concerned about the growing U.S. federal gubmnt fiscal deficit. Much of this debt is being held by foreign central banks.

Perhaps I am missing something, but I cannot imagine why foreign central bankers are holding so much U.S. debt, but maybe they think there are no better options available. Should they ever decide that better options are available, watch out.

According to Tyler Cowen, these concerns might qualify me for membership in the Austrian School of Economics:

If I believed in Austrian business cycle theory,

1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates....

4. I would think these trends cannot possibly continue. Asian central banks may come to their senses. Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix. This, of course, would eventually prove impossible.

5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports. Furthermore I would think it will not handle such an unexpected shock very well....

So far so good, but read the whole thing for some interesting implications. Also, see this article in the NYTimes.

...should the dollar continue to fall - if, for example, global
investors determined that Mr. Bush did not have the will to hold spending down - it would not only add to tensions, analysts said.

At the same time,

Administration officials, along with a number of like-minded
economists, contend that the nation's record trade and current account deficits are not particularly worrisome, a reflection more of strong foreign interest in investing in the American economy than any sign of global weakness.

Judging from this different piece in the NYTimes, I wonder if the U.S. Fed is becoming Austrian as well....
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