My personal musings about anything that gets on my radar screen--heavily dominated by politics.


Deficits and the Global Economy

For those of you comfortable in the world of numbers and pseudo-science—in other words, economics—Gerard Baker (The Times of London) has penned an interesting essay in the latest edition of Foreign Policy. His thesis is simple:

However it comes, any significant fiscal belt tightening in the United States during thenext four yearsis in the long-term interests of the rest of the world. A reduction in the U.S. fiscal deficit should help stabilize international capital flows, halt the dollar’s slide, and boost exports of economic partners.

But, in the here and now, the political costs will be brutal—and not mainly for Americans. As the U.S. fiscal deficit narrow, government borrowing abroad should increase. And as the United States increases its national savings by consuming less, the rest of the world will need to ease fiscal policy to maintain levels of global saving and investment. Put another way: If the United States is to halve its fiscal deficit in the next four years, it would remove a sizeable chunk of money from the global economy that has driven global growth these last four years.

Some of the repercussions of such a policy Baker writes about include political instability within the EU, rocking an already teetering Japanese economy, and a massive destabilization of Chinese banking practices. An interesting read, for the economically inclined. Also points to an area of major domestic policy that has resonance in foreign policy.

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