you read the news about the gears of the world, and it’s interesting. but never forget there’s somebody gettting crushed right now by the gears of the world, perhaps hundreds or thousands or millions of people. 1/

and it’s interesting. but as the gears turn it could be you or your loved ones crushed. and to everybody else it will still be interesting. /fin

people assumed floating exchange rates would handle balance, in analog to Hume’s species flow. no. a payouts tax might be analogous to a degree with an interest rate decline, or an expectation of depreciation, but they are not the same thing. a tax is an instrument with a target.

market participants understand they are not taking a position in a complex system, some of many accounts of which suggests imbalance will punish them, but where exceptions are almost as common as the rule.

they understand there is intention on the other side which will, however gradually, *constrain* outcomes. it is not just prices that matter, but the mechanism or intention that sits behind the prices. never reason from a price change. but you can reason from the overt policy behind a tax.

i think China is a counterexample here. it runs a large overt fiscal deficit, and a larger covert fiscal deficit in the form of underpriced finance to strategic industries by state-affiliated bans and investment funds, losses on which eventually will filter back to central govt balance sheets. 1/

i think the connection between the deficits is much looser than simple “national savings” arithmetic suggests. you can run a large fiscal deficit for investment and export subsidies and generate a larger trade surplus, increasing “national savings” on net. 2/

you can run a low deficit or surplus, and find the public borrows from abroad and a cleverly eager financial system instead of consuming from income derived from deficit spending. 3/

of course borrowing from the domestic financial sector seems a wash to “national savings” arithmetic, but eventually the bad lending finds the public balance sheet. 4/

you can write accounting identities about “national savings”. but the fiscal deficit level alone is not a remotely reliable or useful causal mechanism. 5/

running a larger or smaller deficit can do all kinds of things. these may be part of some useful prescription. but on their own, they are not useful. again, i don’t think the counterfactual of “fiscal restraint” in the US would look anything like Germany. 6/

you would also need the Hartz reforms, and you would also need some trade counterparty to take the role of first Southern Europe then the US to provide the income the state is not. 7/

“smaller fiscal deficit => trade surplus => prosperity without national dissaving” is not a recipe that works without attention to a lot of details, and without international partners to take the other side of the trade surplus. /fin

i guess i don’t think just running a tighter fiscal policy would have the same effect at all. your view of causation is fiscal => trade deficit, mine is trade => fiscal deficit. refusing to run the fiscal deficit i think would have meant depression and/or financial crisis. 1/

i agree that the US was foolish to let the twin deficits finance consumption rather than investment in future tradables capacity (or “metacapacity”). 2/

it would have been hard to do that right thing, as there would have been no market forces to guide it (market forces suggested tradables come cheaply from abroad, don’t produce them), and mistakes would be made that would look like boondoggle and cronyism. 3/

it still would have been the right strategic response to aggressive foreign mercantilism. 4/

but really, the political economy and information problems render it too unlikely, for the US, or really for any country on the other side of a lot of subsidized exports. destructive choices like tariffs are much more tenable. 5/

that’s why i think we do need to go back to Keynes and insist on balance as an international norm. and develop tools, like a financial payouts tax, by which countries can enforce that norm without relying on supranational agencies we have too little international consensus now to manage. /fin