American Truth Teller

What is especially troubling about the U.S. economy?
“The U.S. economy is slipping into its second post-bubble recession in seven years.”

Is the U.S. Federal Reserve partly to blame?
“The Fed’s seemingly open-ended support of unfettered and unregulated financial innovation facilitated a derivatives-based revolution that turned out to have been a good deal riskier than the Greenspan libertarian mantra ever presumed.”

Will the U.S. government’s efforts to stimulate the economy do more harm than good?
“Who will fund the incremental fiscal stimulus that a saving-short U.S. economy cannot finance on its own? If Washington once again turns to foreign lenders to pick up the tab, will pricing concessions in terms of the dollar and real long-term interest rates be required to attract the foreign capital? In its characteristic rush to come up with the miraculous quick fix, neither Congress nor the White House appears to be paying much attention to these potentially dire consequences.”

What role should the Fed play?
“More of a Volckeresque discipline of tough money might be required — rather than the market-friendly actions of the Greenspan-Bernanke approach.”

What is the principal cause of the massive U.S. trade deficit?
“America’s current account deficit is due more to a shortage in saving — stemming from bubbles in asset prices — than from a misaligned dollar. As a consequence, a lasting resolution of the saving and current account problem will require more of a correction in asset prices than a further depreciation of the dollar.”

Is China to blame?
“America does not have a China problem — it has a multilateral trade deficit with over 40 countries. The Chinese bilateral imbalance may be the biggest contributor to the overall U.S. trade imbalance, but, in large part, this is a result of supply-chain decisions by U.S. multinationals.”

In what way is the U.S. economy at the mercy of China?
“In the event of a pullback in China’s demand for dollar-based assets, there could be severe consequences for the U.S. currency and long-term real interest rates. That’s what happens on the slippery slope of trade protectionism — a path that must be avoided at all costs.”

And finally, what is the best solution to all of these economic woes?
“Tough as it is, the only sensible way out is to let markets lead the way. That is what the long-overdue bursting of America’s asset and credit bubbles is all about.”