February 13, 2005


U.S. debt: Watch out for the domino effect (Daniel Altman, February 12, 2005, International Herald Tribune)

Edward Yardeni, the chief investment strategist at Oak Associates, a fund manager in Akron, Ohio, sees things differently. "Why would the Japanese and Chinese change the rules of the game when the main reason they've been buying the dollar is to support it?" he asked. "Why would they suddenly let the dollar go into a free fall?"

Yardeni hearkened back to the 1980s, when, he said, American companies feared that Japanese private investors would lose their lust for American assets in the wake of big trade deficits and budget deficits. In the end, they didn't. "I don't know why there's a perception that there's going to be an endgame here," he said.

From Yardeni's perspective, the United States is becoming a unique case in economic history. As the world's main economic superpower and biggest export market, its purchases support the economies of countries around the globe. Those countries plow the resulting wealth back into the United States, where they can earn a safe return - often a much safer one than they could find at home. The trade deficit grows, foreign inflows of money match it, and everybody's happy.

Though Yardeni doesn't expect this pattern to continue forever, he said it probably can for several more years. But with time, he prophesied, other economies will provide more demand for exports and more safe homes for money. As that process moves forward, the pressure will come off the United States. "As the rest of the world becomes more prosperous, I think you'll see a more balanced trade situation," Yardeni said.

That's a rosy scenario, to be sure, but Yardeni said he's losing patience with the "currency calamity crowd," his name for people who keep predicting the end of the financial world. "The pessimists have been getting a lot of press, but if you look at their forecasting records in the past couple of years, they're just dead wrong."

Couple of years? How about centuries?

Posted by Orrin Judd at February 13, 2005 6:33 AM

Yardeni was the guy who said Y2K was going to collapse the world economy...

Posted by: M. Murcek at February 13, 2005 9:48 AM

And got us to spend billions to avoid it, fueling an unprecedented period of productivity growth.

Posted by: oj at February 13, 2005 10:01 AM

True. I thought he got too into himself as 1/1/00 approached, but arguably his alarmism helped us deal with real problems while upgrading systems to move goods more efficiently

Posted by: JAB at February 13, 2005 12:26 PM

The 'trade deficit' is such an inexact measure that it is almost completely irrelevant. If we are draining so much money out of our economy, why are interest rates and unemployment so low and why is there so little inflation?

Posted by: Bart at February 13, 2005 1:23 PM

Where is Krugman when we need him?

Posted by: Genecis at February 13, 2005 3:38 PM