Thanks for taking time from your busy holiday schedule to share your thoughts.

My question is that what metric are you using to determine whether the net export position is becoming too big of a drag on the economy? The reason I ask is that 2/3 of US aggregate demand comes from household consumption, and that pretty much dwarfs the current account deficit even at its current 7% and decreasing. I recently read Greenspan’s Age of Turbulence where he states that the bigger phenomenon is the increasing leverage of all US economic actors, from the households to the banks to the government, and that the current account is merely a reflection of these leveraging activities spilling over across borders. Doesn’t he ratio of the current account deficit vs. consumption as a percent of GDP support this view?

Many people are quick to blame the profligate American consumer for overconsumption and causing the massive trade imbalance, but I’ve been thinking about this by applying an Austrian Business Cycle Theory concept. (I dislike them immensely, but they are an interesting tribe with some insightful thoughts, at times). Anyways the ABCT argues that artificially lowering interest rates encourages short-term investment in place of deferred investments (aka savings). This leads to malinvestments which cause bubbles and imbalances. So, perhaps free trade as its been structured created price distortions that lead the consumer to consume now instead of save, a sort of “malconsumption.” An outcome which can be certified by any number of statistical indicators. These price distortions could be caused by currency manipulation, credit expansion, wage arbitrage, etc.

This sort of thought leads me to agree that the *cause* of the current world financial crisis were global trade imbalances. But I would say the “root” cause would be the actions of both the mercantilist trade surplus countries and the inactions of the deficit countries. Just a thought.

Hilton, I have argued many times that I think the post-1997 decision by several Asian countries to accumulate large reserves and run large trade surpluses (all aimed at avoiding a repeat of 1997) was one of the key sources of the global imbalance. I have a piece in the up[coming YaleGlobalOnline and the January issue of Far eastern economic review that go into this, as well as many previous blog posts.

Seatrus, I am sure there is no single “cause” but rather a confluence of cause, but I don’t see any historical evidence that in previous periods of rising income inequality in the US the trade deficit ballooned to anywhere near recent levels, and I believe that the recycling of the US trade deficit was a great source of global liquidity expansion. After all in China we have seen an even more rapid increase in income inequality, and although there certainly has been speculative bubbles and credit growth, they did not lead to large deficits. I am also not sure how causality runs between rising income inequality and excess credit expansion.

Lei Jiang, I think competitive devaluations will occur against the dollar. Of course not everyone can devalue their currency, but everyone can inflate. You may be right about lower interest rates not spurring new production facilities (no one wants to borrow to build new factories), but by lowering interest costs it may make it easier for companies to run inventory longer and to keep production facilities open that might otherwise close.

Doesn’t this mean that if the same happens, more will voice their objection and there is more chance the policy makers will actually listen as they can also see the history?