Assessing Propositions One and Two

This chapter assesses the evidence that, in the absence of major (and improbable) spontaneous policy initiatives, the “exhaustion proposition” is a high-probability event that would impose serious costs on the global macrofinancial system.1 The chapter is, then, an exercise in applied political economy. It uses the broad-ranging approach suggested by Robbins (1981).2 In quantitative terms, the chapter draws directly on the numerical evidence given in Chapter 5 as well as on the conservative (read “optimistic”), pro-forma estimates of the US INW and the volume of easily encashable financial assets owned by private non-residents through 2010 (Table 5.9).3 In addition, Section II draws on the estimates of those economists who have identified the linkage between the deficit on current account and the domestic performance of the US economy. The reader must, however, recognize that past behavior is not necessarily a reliable guide to future behavior,4 if only because the background conditions (national and global Northian institutions) evolve through time. Moreover, in the current international political climate, political responses are likely to change. The inferences drawn in this chapter assume the absence of substantial real exogenous shocks.