ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Alex IzurietaSubscribe to Alex Izurieta

Instability in the US: It Is Not Debt but the Lack of It

Financial crises and their lessons are quickly forgotten; this time is no exception. The true problems of the US economy, to which the rating agencies have turned a blind eye, persist to this day. Now Standard & Poor's states that a very large government debt poses a systemic risk and calls for more stringent fiscal austerity. S&P has got the numbers and the rationale wrong. The systemic risk resides on a public debt that is too small for what is required to climb out of the Great Recession.

Fundamental Flaws in the European Project

The euro aimed at removing nominal exchange rate fluctuations in a wide free-trade area and was informed by a neo-liberal view of leaving policy entirely to market forces. In consequence, by way of its specific design, it removed three essential policy instruments at once from the domain of national policymaking - exchange rate management, monetary policy and fiscal policy- and it intrinsically weakened labour and welfare policy. These are the fundamental flaws in the design of the European project.

Financial Imbalances in the World Economy

The current account deficit of the US is by far the largest that the world has ever seen, equivalent to about 7 per cent of US national income and nearly 2 per cent of world income. The present situation relies on large capital inflows into the US, but the concentration of investment in the highest-income regions of the world is socially damaging, destabilising and prejudicial to the effective development of resources in the world as a whole. The US deficit can be contained in a less damaging manner only if the rest of the world contains its own surpluses and boosts investment in other regions.

Hazardous Inertia of Imbalances in the US and World Economy

This paper revisits the economic expansion in the US since the early 1990s by looking at the structure of aggregate demand and the financial balances of the main sectors with the help of a consistent set of Social Accounting Matrices, Flow of Funds and Matrices of Stock Balances. It highlights the by now obvious fact that the US expansion was allowed to continue by the exacerbation of unprecedented global financial imbalances. By exploring econometrically the patterns of aggregate demand, it concludes that for the US economy to keep growing at such a pace, continuing asset appreciation (real estate and equities) and capital inflows from abroad are required. Such a path is precarious, and potentially hazardous for the US and the world economy because it relies on ever-accumulating debts. There seem not to exist marketdriven alternatives which would not involve serious macro-financial crises. Unless a congenial, policy-coordinated solution is found, the inertia may prevail? until it lasts.
Back to Top