Is Edward Prescott Overvaluing Federal Financing?
The following from the winner of the most recent Nobel Prize in economics may surprise many:
STOCKHOLM (Reuters) – The U.S. current account and budget deficits, which some analysts see as the cause of the dollar’s depreciation, pose no problems for the world economy, one of the Nobel 2004 economics prize laureates said on Tuesday…”The U.S. (current) account deficit, no problem. People that say there is (a problem) are ignorant, they do not understand something called balance sheet, present value, something that a good undergraduate (economics student) learns,” Prescott said.
I have always been impressed with his paper with Ellen McGratten – Is the Stock Market Overvalued? – even if it is fashionable among some to believe the stock market was displaying Irrational Exuberance in early 2000. But what kind of present value analysis is Prescott using to suggest that the Federal budget is not on an insolvency path?