Levey & Brown

1. The overstretch myth: “the U S economy rests on an unsustainable accumulation of foreign debt … sudden unwillingness by investors abroad to continue adding to their already large dollar assets would set off a panic, causing the dollar to tank, interest rates to skyrocket, and the U S economy to descend into crisis, dragging the rest of the world with it.”

U S hegemony is solidly grounded The U S economy continually extends its lead in technology and innovation The dollars role as the global monetary standard is not threatened The risk to U S financial stability posed by large foreign liabilities is an exaggeration

2. The shift from the world’s largest creditor to world’s largest debtor has occurred. The alarming trade imbalance mirrors pre- meltdown conditions of several past economies. But, to compare emerging markets’ histories to a market of global hegemony is to compare apples and oranges.

3. (NIIP) Net International Investment Position should be deconstructed: All other things equal, at the current level of current account deficit growth: NIIP would be negative 100% of U S GDP by 2010 Things won’t remain equal, there will be –Future dollar depreciations –Market adjustment in interest rates –Market adjustment asset prices

4. Any way you look at the U S declining NIIP, it reflects strong fundamentals The trade imbalance - a strong dollar and US structural import bias An accounting identity – Investment needs savings and U S households continue to save at a negative rate.

But there are problems with national accounting of GDP Capital gains on financial assets are counted as income (interest) Gains on 401K’s are deferred Homeowners consider the homes as savings (appreciating physical assets) but are counted as Investment The composition of global wealth – –the U S economy is expected to grow faster than Europe and Japan, –again an accounting identity: –Positive capital inflows create negative net exports

5. Foreign central banks do not make purchases of U S federal deficit for the same reasons as private investors (rebuttal)

6. If U S stock prices and bond prices decline U S investors would save at home rather than abroad