Gloom and doom

Willem Buiter writes in a Financial Times blog that the proposed fiscal policy in the U.S. is likely to have unfortunate long-term results. He thinks there will be a massive flight away from U.S. assets in two to five years.

Given the bad fiscal position of the US Federal government and given the vulnerability of the external position of the US and its growing reliance on foreign funding, the scope for expansionary fiscal policy in the US is much more limited than president-elect Obama’s advisers appear to realise. Underneath the effective demand problem is a deep structural rot, especially in household sector and financial sector balance sheets.

It is pessimistic, but not for the usual reasons that others have expressed pessimism. I am not sure what to make of his argument. However, most people have not recognized that the special international status of the dollar has allowed us to get interest-free loans worth several hundred billion dollars from the rest of the world, and if people lose faith in the dollar, those loans will quickly come due.