According to Andrew Samwick, the world's central banks are too big to behave rashly. As he puts it:
"We're too big an economy, and our creditors' portfolio holdings are simply too large for them to behave rashly."
That, according to Samwick, and I suspect Altig and Polley, is a key reason why the
US will be able to reduce its large current account deficit gradually, without any major disruptions in financial markets or a sharp slowdown in US economic activity.
I have one problem with the Samwick argument. It relies on a strange definition what constitutes prudent (assuming prudent is the opposite of rash) behavior by Asian central banks. Why exactly is it prudent for central banks to be issuing large quantities of local currency denominated debt (if they sterilize) to buy $500 billion of dollar denominated claims on a country that is running a current account deficit that looks set to approach 7% of GDP in 2005?
Point taken. I think one has to stretch to describe the Asian central banks' behavior as fully rational. My own view is that they have perceived needs for macroeconomic stability at home, and maintaining undervalued currencies and trade surpluses relative to the U.S. is one way they try to achieve it.
So I have thought more about it, and I can sketch out my hard landing scenario. It's based on the story that has its punchline as the title of the post. It's not just one foreign clientele that is gobbling up our debt.
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