When I was in college most macroeconomics classes passed a point when discussing the consequences of government budget deficits where they said "of course, this only applies to small open economies like New Zealand, Australia, the Netherlands, Sweden, Denmark, Argentina, Norway, Chile ..."
These projected consequences included some painful combination of (1) a dramatic rise in real interest rates to underpin foreign exchange inflows, (2) a sharp fall in the value of the currency meaning that foreign goods and services were much more expensive, (3) painful cuts in government services to service the debt, (4) migration of skilled labor to economies where the real worth of their wages was higher etc, etc ...
America as a large closed economy whose currency now underpins world exchange was assumed to have much more room for error. Unfortunately, as Brad DeLong points out we've made the errors, and we've come to the end of the room.
American economic conversations might start sounding a lot like New Zealand eocnomic conversations circa 1991, or Australian conversations circa 1983 ... It ain't pretty folks, and it was all totally avoidable.
Posted by robe0419 at November 9, 2004 2:11 PM