LIQUIDITY TALK. A 'CONSENTING ADULTS' VIEW ON THE US CURRENT ACCOUT DEFICIT
[Latest Global Dollar Liquidity measure: +12.4% annual growth rate; latest Endogenous Liquidity Index: -31.9%]

Kudos to Brad Setser! Economist Richard Iley, who holds sharply different views on the US current account, is 'guest-blogging' at RGE Monitor (*). I have always felt that large current account deficits could be treated with benign neglect provided that: (a) property rights remain stable; (b) productivity gains persist. In the event, this is largely the case in the U.S. According to Mr. Iley: "The obsession with ‘official’ inflows into the US seemingly arises from two controversial conclusions. First, that central bank purchases are somehow special, if not outright ‘abnormal’".

"Flowing on this is the usually tacit but sometimes explicit assumption that central bank purchases may prove more ephemeral or footloose than more inherently normal private capital flows. Both assumptions are highly dubious ... The lesson of recent years has been that foreign demand for US assets – both private and ‘official’ – appears more structural and hence more sustainable than anyone thought ... the marginal productivity of holding dollars appears to be higher than most economists believed".

Read the whole thing!

(*) Richard A. Iley & Mervyn K. Lewis. Untangling the US Deficit. Evaluating Causes, Cures and Global Imbalances. (Cheltenham: Edward Elgar, 2007).