A POSSIBLY OBTUSE ECONOMIC QUESTION….In Stephen Mihm’s profile of bearish economist Nouriel Roubini this weekend, we first get a rundown of the various global economic crises of the 90s:
Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs….After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’.
The United States does indeed have an enormous and growing current account deficit that plainly can’t last forever. Something needs to be done. However, later on we get a few paragraphs about the current subprime-induced credit crisis:
Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed’s willingness to engineer a takeover of Bear Stearns.
So here’s the part where I get confused. The only way to balance our current account is to stop importing more than we export. In other words, we need to reduce our net consumption of foreign goods and services, which almost certainly means an overall reduction in our consumption of goods and services too.
On the other hand, a credit-induced recession demands that we stimulate consumption. Otherwise we fall even deeper into recession.
So which is it? Increase consumption in order to keep our current recession from turning into a depression, or reduce consumption in order to avoid long-term disaster caused by a growing current-account deficit? Can we somehow do both with an export-driven boom? Is there another option I’m not taking seriously enough? Or are we just screwed?