Posted on 03/26/2006 10:05:19 PM PST by Neanderthal
I just added "deficit" and "debt" to the keywords. I felt like adding "dreadful" as well, because this topic really is dreadful, what it means for the future ...
That would be a gold bug song. Foreign holders have their own structural problems which will not be sorted out any time soon [China with its money-losing state enterprises and epidemic corruption; Japan with its asset bubble and the pension costs; Europeans with the costs of their welfarism]. This is what prolongs the current structure. His scenario is predicated on the major foreign holders successfully overcoming their domestic problems first.
I tend to doubt the authors allegations. As a percentage of our GDP we ran higher deficits both during WW2 and the Reagan era.
That is true.
However, by percentage of GDP, we are spending less on Defense during the current GWOT than those times you cited.
Today spending, tends to be on other concerns.
Far more is going into straight entitlements, and not as much on building infrastructure and developing technology that actually pay-out in the long run.
Read later.
This is serious, but not as serious as the author portrays.
Every country that ran a current account deficit like the US, has had their economy blow up in their face.
However, the US is very unlike the other blow ups in that those countries had CA deficits because no one wanted to buy their stuff. The US has a CA deficit because everyone wants to invest here.
from the article "in part, the current account predicament is a reflection of the fact that the United States sits at the center of an "international financial system where its assets have been in high demand."
What happened in other countries is their economies stalled (usually via too much govt. boondoggles and welfare spending), then they borrow money in US dollars to import goods the economy no longer produces, then the currency crashes but the foreign debt is denominated in dollars so suddenly, they owe money that can not be repaid because their money is worthless. The end result is they have no dollars, no one wants their worthless paper, they can't import which means vital goods are no longer available and that is the ugly end.
This will not happen in the US because the US is a huge economy so things will happen slower. Inject a mouse with poison and it dies, do the same with an elephant and it dies very slowly. This will allow the US time to correct the problems. Also, the US foreign debt is in dollars and not someone elses money. So if our currency crashes, we can still repay in dollars.
This will end badly for the US as the only way out of a CA deficit is to produce more and import less which is the same as working more and getting to spend less. But it will not likely be anything like what happened to other countries with a similar problem.
Yawn. The current accout plus the capital account MUST equal zero. Thus a current account deficit may mean foreigners don't like our goods as much as we like theirs OR it might mean that foreigners like US assets better than they like their own.
For example if Mark Steyn is right on the futre of increasingly Islamic Europe, then we will observe a US current account deficit for a century as Europeans sell their assets and buy assets around the world, particularly in the world's safe haven the US.
The current account deficit is more or less the trade deficit. It is not the budget deficit.
The CA deficit is the trade deficit plus earnings from investments and foreign aid.
So if I buy a jap stock, sell it at a 10k profit, take the profit and buy a jap car.
The trade deficit would be 10k, but the current account deficit would be zero.
If a mexican makes 10k in the US, sends it home to mom and mom buys a US car, the current account is again zero but the US would have a trade surplus.
If I borrow money and buy a 10k german car, both the current account and the trade deficit would be 10k.
No Yawning. What you said is also true of other countries and those with a large CA deficit have had and ugly end. The US is different, but not so different that we get off pain free.
That's because the only "fix" for a current account deficit is for a government to purposely ruin its economy. Singapore was an exception in that they let matters run their own course, and they came out of it rather well.
They are still professional economists, which means they score more points by calling attention to themselves, rather than being right.
"the only way out of a CA deficit is to produce more and import less which is the same as working more and getting to spend less."
Hmmmm... Which is one reason you'd think that our government would be all over alternative energy sources. If we eliminate a good portion of our dependence on foreign oil, and suddenly our trade deficit isn't as daunting. That's like a 30-35% reduction right there.
Alt energy costs more than arab oil. For the consumer this means working the same and after paying more for alt energy, you get less.
This would make politicians very unpopular, but it would help the CA deficit.
Alternative Energy research was what I was going for. If we ever get to the point that we're safely burning hydrogen for fuel from water, Arab oil is a thing of the past. Might put a nice little ding in terrorism, too, when all of their economies collapse and they don't have all that money to fund them.
And, so what if it means that some manufacturing moves back here? ("Br'er Fox, do with me what you will, but PLEASE don't throw me in that briar patch!")
If you're inclined to buy gold I'd say you'd do much better buying bullets.
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