patrick.net

I believe the positive knee-jerk action to Katrina will fade very soon. The psychological effects of the storm will be quite negative. For instance, don't people wonder more about the consequences of a natural disaster to homeownership?

Moreover, the economic impact of the hurricane is far beyond damages in New Orleans. Any business with significant ties to the region will be severely affected. Many of them are small businesses whose survival depends upon the trade.

On the other hand, the new bankruptcy law takes effect in a little more than a month.

The perfect storm is brewing...

Randy H.:

How do you account for this, clipped from an Economist article of 2003:

America's rate of borrowing is high and rising. At just over 5% of GDP, the current-account deficit is the highest in the country's history. Even in the final decades of the 19th century, after the Civil War, America's deficit was generally below 3% of GDP (though Canada and Argentina ran deficits as high as 10% of GDP in that period). In the Reagan era, the current-account deficit peaked at 3.4% of GDP.

Some of the recent rise may be a statistical quirk. According to official numbers, the world as a whole runs a current-account deficit with itself, and one that has risen sharply since 1997. Since the world does not, as yet, trade with Mars, the numbers must be wrong, so some of America's current-account deficit may be more apparent than real. But not all of the recent rise, or even most of it, can be explained this way.

In fact, America's current-account deficit is becoming worryingly large. Several studies suggest that economies hit trouble when their current-account deficits reach 4-5% of GDP. Caroline Freund, an economist now at the IMF and before that at the Federal Reserve, looked at 25 episodes of current-account adjustments in rich countries between 1980 and 1997 and found that the current account typically begins to reverse after the deficit has grown for about four years and reached 5% of GDP.

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Perhaps your definition of current account deficit is different than the standard, but I do not believe any G8 nation has a larger one.