"It feels strange to be quoting [NY Times economist] Paul
Krugman," said colleague Dan Denning last night. "But his
analysis is pretty good, even if his solutions are
foolish."
"There one thing I can't help noticing," wrote the foolish
economist earlier this week. "A Third World country with
America's recent numbers - its huge budget and trade
deficits, its growing reliance on short-term borrowing from
the rest of the world - would definitely be on the watch
list."
Normally on the 'watch list' are Third World countries with
big financial troubles. Argentina, Brazil, Indonesia,
Malaysia - all have made the watch list. All have
subsequently suffered banking and currency crises, or
hyperinflation, or depression or some hellish combination
of economic fire and brimstone.
But now, "the U.S. budget deficit is bigger relative to the
economy than Argentina's in 2000," says Krugman, "and the
U.S. trade deficit is bigger relative to the economy than
Indonesia's in 1996.
He continues: "The brokerage firm Lehman Brothers has a
mathematical model known as Damocles that it calls 'an
early warning system to identify the likelihood of
countries entering into financial crises.' Developing
nations are looking pretty safe these days. But applying
the same model to some advanced countries 'would set
Damocles' alarm bells ringing... most conspicuous of these
threats is the United States.'"
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