The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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March 28, 2005

Soft Landing, Or Hard?

Nouriel Roubini and I debate the issue in the latest installment of the Wall Street Journal Online's Econoblog.  Get it while it's still free.

UPDATE: Andrew Samwick agrees with me, as does William Polley (and both add to the argument).  But I didn't dent Brad Setser's resolve, and be sure to check out the discussion board at Econoblog where, last I looked, the sentiment was running heavily in Nouriel's favor.

UPDATE, THE SEQUEL: The Eclectic Econoclast reports that Peter Drucker agrees with Roubini and Setser.

MORE: Michael at Global Trader's Diary adds his thoughts.

YET MORE: An excellent summary by Kash ar Angry Bear.

ONCE MORE: Brad DeLong comments on Kash's post (thanks, pgl).  However, he does neglect to link to the Econoblog debate that instigated Kash's remarks  Hey, Brad! Give us some love!

I TAKE THAT BACK: Professor DeLong graciously comes through.

MORE WORTHY STOPS: General Glut says "My contrary nature pushes me towards the 'hard landing' group, but I'm convinced that this landing is further off than either of the Brads [DeLong and Setser] seem to suggest." 

Don Boudreaux suggests we keep our eye on the "ultimate source of whatever genuine problems exist – namely, here, outlandish government spending and excessive deficit financing."  I think Nouriel may agree with him on this point. 

March 28, 2005 | Permalink


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» Soft Landing, or Hard? from Brad DeLong's Website
David Altig asks (rightly) why I didn't link to his and Nouriel's pieces in the Wall Street Journal. Ummmm... Sloth? macroblog: Soft Landing, Or Hard?: Nouriel Roubini and I debate the issue in the latest installment of the Wall Street Journal Online's... [Read More]

Tracked on Mar 31, 2005 4:12:55 PM


Thank you. Very interesting discussion.

I think we are close to a housing US slow down. That would lead to less mortgage equity withdrawal, a slow down in the US economy and probably a lower trade deficit.

I could envision a lower current account deficit and a higher budget deficit in a slow down. As Dr. Roubini pointed out, most of the foreign buying is going to treasuries, but if the current account deficit decreased and the budget deficit increased ... how would we finance the fiscal deficit?

The answer would be higher interest rates and, as you suggested, more savings. Eventually that is a positive, but in the interim I think that puts the US into a recession with a strange combination of a slowing economy and higher interest rates.

The higher interest rates would slow the economy more, the deficit would increase, and interest rise some more ... a vicious cycle. I'm leaning towards a hard landing, but different than Roubini's scenario.

Thanks again. Best Regards!

Posted by: CalculatedRisk | March 29, 2005 at 03:19 AM

CR -- two points.

first, our scenarios are not all that far apart. Nouriel and I tried to lay out the risk that the financing for the US government/ consumer gives out before the US government/ US consumer demand for financing gives out, leading to higher int. rates that force a fall in US consumption/ a rise in domestic savings. You have nicely spelled out a scenario where the US consumers gives out (b/c of slower increases in housing prices reduce their capacity to support current spending by borrowing against rising asset values, combined, I assume, with higher oil/ gas prices) before the financing gives out ...

2) I agree with you that in most disorderly adjustment scenarios, the fiscal deficit would tend to rise. Automatic stabilizers and all. That is the risk you run when you run large deficits even in (relatively) good times. As FRBNY president Tim Geithner likes to point out, it means you have less of a buffer against bad times. Would the US be forced to run pro-cyclical fiscal policy, and cut to offset the effect of a cyclical slowdown on the fiscal deficit? Probably not, if cutting means fully offsetting the impact of a cyclical slowdown to keep the deficit from rising. But the US could well be forced to tighten up somewhat to avoid an even more adverse reaction in certain financial markets ...

Posted by: brad | March 29, 2005 at 04:56 PM

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