Ignoring The Coming Collapse

J. Bradford DeLong

July 12, 2005

J. Bradford DeLong, professor of economics at the University of California at Berkeley, was assistant U.S. treasury secretary during the Clinton administration.

This month, the Bank for International Settlements (BIS) was the latest to worry aloud about the financial risks that the world seems to be building into its future. “[A]ll the countries hit by financial crisis...experience[d] a very sharp slowdown,” the BIS says of Mexico in 1994-5, East Asia in 1997-98, Russia in 1998, as well as Brazil, Turkey, and Argentina subsequently. It then cites “global current account imbalances,” particularly “the U.S. external deficit,” describing it as “unprecedented for a reserve currency country to have a current account deficit of such magnitude.” In short, the world has become “increasingly prone to financial turbulence.”

The BIS hints at the possibility of a financial crisis that, with the United States at its center, would dwarf all crises since 1933. The BIS issues the standard recommendations: “Deficit countries should reduce the rate of growth of domestic spending below that of domestic production. Allowing their currencies to depreciate in real terms would make their products more competitive, and also provide an incentive for production to shift out of non-tradables into tradables.”