...CA-deficit... probably on track to be a 7.5%...

Interview (a Gst...ehm..., Davos...) de Kenneth Rogoff a la FTD...


Transcript (de la part de P.-V.) ici...


Kenneth Rogoff, there had been much talk about when the dollar will fall and because of the big imbalances, you have done much work on that, why didn't it happen yet?


Well, I've done a series of papers starting in 2001 with Maury Obstfeld at Berkeley where we look at scenarios under which the US current account would shrink and the implications for the dollar, we looked at scenarios like a rise in the US savings, higher productivity in Europe, asked, what would the effects on the current account be and implications for the dollar... now, the..., the thing that our model doesn't, you know predict very well  is the current account and I don't think there doesn't exist a model that it predicts that really well (P.-V. thinks that the affair of the CA represents for him, the finest form of political economy...) so, I think what the surprise has been, has been that US CA deficit has been so durable my take on it, as we've been in this extraordinarily benign period of high global growth, and very very low volatility ("M. Trichet avait jugé, samedi, à Davos (Suisse), que le risque financier était sous-évalué. Les taux d'intérêt sont très bas, et la volatilité élevée. "Cela n'est probablement pas durable", avait-il ajouté."...donc...volatility equity market + volatility forex market = ...0? ), where anomalies can go on for a long time. Turkey can run a big CA-deficit and have a big public debt and money keeps rushing in... I mean, I hope Turkey does well but what it would face in a more normal environment would be a lot more like what we saw in May of last year...this is the same for the US so, I think people who say this is gonna go on for 25 years well if we have a global boom with no volatility for 25 years, I agree, but when we see some normalization, I think it's quite a vulnerability and we could see much more movement than now...


When we look at the global exchange rate of the dollar, the nominal exchange rate vis-à-vis all the different other currencies...the dollar has already come down... By how much and how much is it?... why didn't it reduce the CA deficit in the US?


Well, the dollar has come down but the... since... in fact it started coming down maybe a year after we wrote our paper in 2001, maybe [...?] on a trade weighted basis but the anomaly is our model says that wouldn't have happened yet because in our model, a durable drop in the dollar doesn't really happen or the CA shrinks and it hasn't... so...you know in fact... that's the larger puzzle for us, is not that the dollar has come down more but that it came down without the CA coming down. You know, I don't see the Euro being as out of line with the dollar as emerging markets in Asia, the Yen...you know as we speak today as at 121 Tokyo feels cheap... you know, all of the sudden it's incredible, so the big realignments that need to take place are with Asia also with a number of the emerging markets...


But the Asians are the only ones who defend their currencies not to appreciate, ...the Europeans have suffered that in the past two years what is your opinion on that ...how should Europeans avoid that they will appreciate against the dollar...?


I don't think there's much that Europe really can do. I think the positive approach that Europe can take, is to try to become more of a financial center like the US. I envision a Euro appreciating further and Europe's starting to run significant deficits...like the US is, but in a positive way where Europe is becoming more a financial center and those deficits represent investing in financial assets in Europe ...this is very good business btw, the US makes a lot of money off this and I think btw. the natural US CA deficits, it's not zero, it's probably 2%...of GDP, but it sure isn't 7% of GDP like we're saying now...so Europe were, as a whole, you know, very close to balance, could easily mimic the US and the 2%...that's consistent with having a somewhat stronger Euro...


How could the CA easily be reduced in 2007 as we are now what could happen... Asia and especially Japan and Germany begun to grow much faster, so it's already sthg. which goes in the right direction but it didn't really change very much up to now what could happen...?


Well, it means it is changing so I think we in fact at the moment... are entering a benign scenario in which part of the adjustment process is taking place, so... the biggest part is Europe is growing faster, oil prices are coming down, the US CA which might had been at 6.5% of GDP for 2006 it's probably on track to be a 7.5% in 2007 but, because of the declining oil prices, because Europe is been outperforming, I think it's actually gonna coming under a 6% if we saw the Chinese and Asia currencies move more maybe that would bring it to 5%...what hasn't happened is US savings has not moved very much... it's stunning so... that depends on many factors but the housing market really hasn't fallen that much the equity market has probably countered anything that's happened in the housing market so I think if US savings doesn't rise then we'll probably see the CA continue to sit there at 5.5% ...this movement is gonna to bring the dollar down a bit more but it's, we're not going to see anything dramatic, so we're in a benign scenario at the moment, we're not seeing a crash in 2007, but, we might not always be in a benign scenario...


What could Americans do?


Hah... well, I mean the truth of the matter is the biggest vulnerability of the US at the moment are geopolitical... that the US has an incredible mess on attend in Iraq, in the M-E.,... weak and global position generally and I don't think the bill has come home for this...and the first thing Americans need to address is to get this right...I don't see that happening in the near term I have to say...but until Americans straighten this out, they're very, very vulnerable...there are certainly other things you could do...you could try to balance the budget a bit, who would make a lot of sense...we're in an epic boom... it just can't get any better than this and yet, we're running in deficits, we have the social security problem... there's a lot that could be done...but unfortunately, I don't think that very much is gonna happen...


Last question on that...when should we start to worry about the CA deficit...?


Well, I think when we see a sharp rise in volatility in markets that's driven by some obvious fundamental factor, I keep harking on the geopolitical [...?] we could have a 30% drop in housing but some obvious fundamental factor that's raising volatility in the macro-economy and markets...which are at record lowest by many measures...then we can start whining...