If something can't go on forever, it will
By Scott Sumner
You may recall a famous saying by Herb Stein:
If something can’t go on forever, it won’t.
I don’t quite believe that, although I must admit that Stein has me beat on logic. But I’ve noticed that when people say something can’t go on forever, the day of reckoning never seems to arrive. For instance, inflation hawks tell me the Fed can’t just keep increasing nominal GDP forever (at say 5% per year.) Why not?
Then there are the countries that are “living beyond their means,” such as Australia and the USA. The US has run current account deficits for many decades. Some claim we benefit because the dollar is the international currency of choice. This is called “exorbitant privilege.” Nonsense. Australia’s been running huge CA deficits for longer than the US. Here is a graph from Marcus Nunes’ excellent post; as you can see Australia typically runs a current account deficit of about 4% of GDP, and has been doing so essentially forever.
Is the Australian day of reckoning about to arrive? Well they probably will have a recession some day, although by keeping NGDP growing at a fairly healthy rate, and coming back to the trend line when they deviated, they’ve avoided the 2001 and 2008-09 recessions. Their last recession was in 1991, even though in theory a commodity-based economy should have more recessions, as the real side of the Aussie economy is much less stable than the US.
Why do people think the Aussies can’t keep running CA deficits forever? Because they were taught that a CA deficit means that you are borrowing money from the rest of the world to support your consumption. “You are living beyond your means.” Not true, consider the following data point from Australia:
In Australia, foreigners bought a record 14 percent of new properties in the first three months of the year, based on a survey of property professionals by National Australia Bank Ltd.
Suppose some Australian workers built a condo on the Gold Coast, and sell it to a Chinese investor. They take the $500,000, and buy 50,000 sneakers made in China by Chinese workers. This shows up as a $500,000 current account deficit for Australia. That’s because they are importing “goods” and exporting “assets.” But this is clearly nonsense. Indeed the word “deficit” does more to confuse than enlighten. All trade is two-sided; there are no international “deficits.”
Here’s what we should be talking about. Is the Australian government living beyond its means? Is it borrowing too much? No, it has one of the lowest national debts of any developed country, 29% of GDP. That’s far less than half the ratio of Germany; a country no one thinks is living beyond its means.
How are Australian corporations doing? I don’t know, look at the stock market. How about households? The point is that countries cannot “live beyond their means.” That’s not to say that certain people, businesses and governments within a country cannot borrow too much—look at Greece. But you don’t know that from international “deficits,” you know that by looking at Greek fiscal policy, or banking policy, which was reckless during the go-go years.
Social Security will go on and on.
The US will keep running budget deficits for decade after decade.
Australia and the US will keep running current account deficits.
Germany will keep running CA surpluses, as will East Asia.
The NYC/LA/SanFran/London/Dubai/Shanghai/HongKong/Singapore/Sydney housing bubbles will never burst. There will be times when they appear to burst, but it will be an illusion. Prices will bounce back.
Peak oil will keep getting delayed.
NGDP will keep going up and up.
The Spurs will still be winning titles when Tim Duncan is 87 years old.
Unfortunately Herb Stein couldn’t go on forever; he was a voice of reason in an often crazy profession.