The National Saving Identity states:
CA ≡ (T-G) + (S-I)
Where CA is the current account, (T-G) is the consolidated government budget balance, and (S-I) is the private sector saving-investment balance. Figure 1 depicts the profound shifts that have occurred in these components (normalized by nominal GDP).
Last week I participated in a conference hosted by the Federal Reserve Bank of Boston, at which I discussed the new lending programs and asset acquisitions pursued by the Federal Reserve over the last two years. Previously I shared with Econbrowser readers empirical evidence on the effects these targeted liquidity operations seem to have had. Below I reproduce my remarks from the conference on the underlying motivation for using such measures, in which I suggested that the critical question is what was the underlying cause of the financial stress to which the Fed was responding. I distinguished between two possible interpretations of how the financial crisis arose.
Jeffry Frieden, Professor of Government at Harvard, has a new Council of Foreign Relations working paper “Global Imbalances, National Rebalancing, and the Political Economy of Recovery” :
Global macroeconomic imbalances — massive borrowing by some countries and massive lending by others — drove the financial boom and bubble that eventually burst into the current crisis. There is now nearly universal agreement that such imbalances cannot be sustained, and that the former deficit and surplus nations need to move toward macroeconomic balance.
In an Economix post today, titled “The Panic of ’08: Recession Cause or Effect?” Professor Mulligan writes:
…recent research questions the claim that the financial panics themselves contributed to their contemporaneous and severe employment downturns.
Does high unemployment mean that there’s nothing to worry about in terms of inflation?
By Willem Thorbecke
Today, we’re fortunate to have Willem Thorbecke, Senior Research Fellow at Asian Development Bank Institute and a Consulting Fellow at Japan’s Research Institute of Economy, Trade and Industry, as a guest contributor.
Asia’s role in the propagation of the global recession has been a subject of study, but relatively little attention has been devoted to the interaction of exchange rates and production chains. The structure of East Asian production networks and the severity of the recession places a premium on policy coordination in the region.
Real output grew significantly this quarter. Will employment follow?
I thought it of interest to see what surveys of forecasters indicate about two questions being asked: Is a dollar collapse imminent — Martin Wolf is skeptical, while others [0] are convinced the end is nigh — and is a double dip recession likely? I take a look at the messages conveyed by FX4casts.com and the WSJ October survey of forecasters.
During the last two years, the Federal Reserve responded to problems in the financial markets through what I have described as monetary policy using the asset side of the Fed’s balance sheet, replacing its traditional holdings of Treasury securities with a variety of new lending programs and alternative assets. I’ve been taking a look at what effect these operations seem to have had on the problems they were designed to address.
From the abstract to Why are we in a recession? The Financial Crisis is the Symptom not the Disease!, by Ravi Jagannathan, Mudit Kapoor, and Ernst Schaumburg:
…We argue that the large increase in the developed world’s labor supply, triggered by geo-political
events and technological innovations, is the major underlying cause of the global macro economic
imbalances that led to the great recession. …