More about Iceland's CA deficit's ability to tell the future
I think the Economist's economics editors are reading Nouriel Roubini's blog. If not they have certainly been tuned in to the same muse lately as one of the Economist's recent leaders about current account deficits resembles very much the recent post by Roubini about Iceland's and other small countries' current account deficit; I have posted on Roubini's post here. This is obviously not an issue in itself but as I have been quite interested in this topic lately I find the comparison between the Economist and Roubini interesting to pass on if not just to say that blogging actually does have an impact.
Consequently, there is not much new under the sun in the Economist's article but for those who won't bother churning through Roubini's the Economist offers an excellent summary of the argument and also asks the crucial question; is this a prevision of things to come in the USA?
"Over the past month Iceland's currency and stockmarket have fallen sharply; its banks have struggled to roll over short-term debt. Iceland's massive current-account deficit of 16% of GDP makes this tiny economy an extreme case, but it is not alone: New Zealand, Australia, Turkey and Hungary have also seen their currencies fall. Are these the local difficulties of a few small economies or a foretaste of the fate awaiting America?
These besieged currencies have something in common. Their economies all have big current-account deficits, driven in large part by rapid growth in consumer spending on the back of asset and credit booms. Recent events are thus an alert to larger countries with similar symptoms, not least America."
USA in proper company?
Iceland and New Zealand could be warning that countries with big external deficits are vulnerable. America's reserve-currency status makes it likely to be the last to blow, so its deficit may continue to grow. But those studying geysers know that the longer pressure builds, the bigger the eruption."
I do not study geysers but the Economist's and Roubini's points are an important contribution to the ongoing tale of the global economy and its imbalances.