Wednesday, August 05, 2009

Bye-bye Brad, and thanks for all the fish

Brad Setser is leaving the CFR and will no longer track international capital flows. Part of me is sad, Brad was an island of civility and data in a blogosphere woefully short of both. That said, I had stopped reading him as I increasingly realized how fundamentally useless his information was. It can be summed up here:
Fundamentally this blog was about an issue – the United States’ trade deficit, the offsetting trade surpluses in other parts of the world and the capital flows that made this sustained “imbalance” possible. Most of my early blog posts argued, in one way or another, that taking on external debt to finance a housing and consumption boom wasn’t the best of ideas. Even if (or especially if) the deficit was financed by governments rather than private markets.
The US housing bubble was driven by bad credit risk, as the US financial system was (and remains) poorly motivated to accurately assess credit risk. The rest of the world did not finance anything in the US, the US funded the rest of the world's desire for $ savings. This is trivial if you simply think what "asset" is being stored, who can produce that asset, and how much it costs them to do so (answer key: dollars, the US Govt, and 0).

No one is, or needs to, "finance" the US Fed deficit. Tracking it is tracking the demand for US Savings, but how interesting or important is that, really?


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