Pessimism of the intellect

Two must-read commentaries on the current account and macro environment by Brad Setser and Stephen Roach.

Roach: "The real federal funds rate was lowered into negative territory in 2002 and has only very recently moved back to the “zero” threshold.  This marks the most protracted period of negative real short-term US interest rates since the late 1970s -- hardly a comforting comparison.  Carry trades have become no-brainers for yield-starved investors, who can borrow for nothing at the short end of the curve and pocket the spread virtually anywhere else in the risk spectrum.  Carry trades also become no-brainers for income-short American consumers, who can draw down income-based saving and use a very facile refinancing technology to extract newfound purchasing power from asset markets."

Setser: "Today's trade deficit is not only much bigger than our deficit back in the 1980s – when grown-ups like James Baker decided it was too big – it also is much riskier. The US back then had, more or less, as many external assets as liabilities. That is NOT the case now. Our liabilities exceed our assets, and by a substantial margin. Our net debt will be 27-28% of GDP at the end of the year.

Global rebalancing means that over time, the US needs to export more goods and services and less debt. Either that, or it will have to import a lot less. To me, this is common sense, not media misinformation. No country, not even the US, can run up its external debt forever."