Posted on 01/04/2003 4:25:25 AM PST by Fzob
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As the late Herbert Stein, former chairman of the US council of economic advisers, once said: "If something cannot go on forever, it will stop." The combination of an ever-rising US current account deficit with a strong dollar must cease. Indeed, it already is doing so. The currency weakened in 2002. It is rather likely to weaken further in 2003.
The present course of the US economy is unsustainable. Net US liabilities to the rest of the world are some 25 per cent of gross domestic product - in the neighbourhood of $2,500bn (£1,562bn). In the first three quarters of 2002, the current account deficit ran at close to five per cent of GDP. As recently as 1997, however, the deficit was only 1.5 per cent of GDP. It is bigger this year than two years ago, despite last year's economic slowdown. Since the beginning of 1997, trend growth of exports of goods and services, at constant prices, has been 2.2 per cent a year, of GDP 3 per cent and of imports 7.4 per cent. Even under quite conservative assumptions, the current account deficit could, on current trends, be over 7 per cent of GDP by 2007. By that year, US net external liabilities would, at current exchange rates, be close to 65 per cent of GDP. If the dollar is to remain strong, despite these deficits, the rest of the world must accumulate net claims on the US economy at $500bn a year, and rising, for the indefinite future. This is hard to imagine. Already, there has been a steep decline in net private foreign purchases of US assets, from $978bn in 2000 to an annual rate of just $560bn in the first three quarters of 2002. Net foreign direct investment has collapsed, from $308bn in 2000 to an annualised $14bn in 2002. This decline in private foreign purchases of US assets has been offset by a big increase in foreign government net purchases of US assets, from $38bn in 2000 to an annualised rate of $136bn in 2002. There has also been a steep fall in US private purchases of foreign assets, from $605bn in 2000 to an annual rate of just $380bn in 2002. If foreign governments stopped propping up the dollar and US investors invested abroad, as before, the dollar would tumble. Other currencies must rise if the dollar is to fall. But the two biggest economies after the US - the eurozone and Japan - are highly dependent on export demand, at least for the moment, while no big economy offers obviously superior returns to those available in the US. Moreover, other governments, particularly in Asia, are desperately unwilling to see their currencies rise against the dollar. The most potent of all large-scale purchaser of dollars is Japan. Its vast foreign reserves, already $395bn at the end of 2001, rose to $461bn by October 2002. With the finance minister talking of a yen exchange rate below Y150 to the dollar and pressure on the Bank of Japan to expand the money supply, further purchases are probable. If the dollar is to fall, the important currency against which this is likely to happen is the euro, since it belongs to the one large entity whose authorities will refuse to buy dollar assets in large quantities. The dollar has already fallen 16 per cent against the euro since the end of January 2002. This slide could easily continue in 2003. This is a tale of irresistible force meeting immovable objects. The force is the growing pile of US liabilities. The objects are the low real returns in other big economies and the unwillingness of many governments to tolerate currency appreciation. In the short term, the objects may win. In the long run, the force will be stronger. The dollar must fall. The longer it remains high, the bigger its fall will be |
Prices for all imports, including oil, will increase here and generally, the world's economy will slow, hurting everyone,...
Adjusted for inflation the price of oil is very low. Which prompt this question in my mind. If oil prices were to increase enough to spur capital investments in the petro-chem business is that really a bad thing? Or is my assumption that capital investment in that area would grow is false.
That's one way of looking at it.
The price of oil is relative to the price of oil. It is its own benchmark -- like gold. Adjusting it for inflation is a politician's trick.
I'm getting concerned with the lack of correlated spending cuts to go along with tax cuts. I think Bush is headed for some trouble here. We are bleeding red, interest rates are in the toilet (where is the incentive for saving yet?), American consumers are on the hook for a trillion and a half in credit card debt (which, interestingly enough, doesn't track with interest rates), and yet the government still grows. We're going to become a nation of gimmicks and tricks. That's not a good thing.
This is the real problem with the recent corporate accounting scandals. We sold the USA as a great investment destination based on wildly profitable numbers during the 90's. Many foreign investors were astounded by just how great the numbers were...and now they know why...those numbers were phoney. This is one of the big reasons why FDI (foreign direct investment) in the US economy is dropping (China recently passed us up as the #1 destination for FDI): foreign investors don't trust our numbers anymore.
History shows that when a trade deficit passes 5% of GDP, that country's currency takes a big nosedive. I believe that our current deficit is around 6%. We have been living way beyond our means for a long time....but its been a comfy ride because its one heck of a sweet deal....we consume at a steep discount. But it won't go on forever.
Eventually real prices for imports will rise, and prices for US exports will fall, to the point where the dollar value of exports equals the dollar value of imports. What that will do to living standards in the US is another story -- it won't be good in the short term
What has been happening over the past few years is that the US has been exporting dollars in exchanged for high priced oil, and low-priced Chinese stuff. Since the Fed does not want to crank up the printing presses and creating large-scale inflation, that means there are fewer dollars in the US to buy US-made goods, which results in unemployment, as US companies are unable to sell enough of their product.
Money is to a country like blood is to the body: as long as it circulates, the body is healthy. But if you bleed out too much past a threshold, you die.
Bingo!
and the people who will really pay will be the poor and middle class.
Don't they always?
The poor by having less buying power for whatever dollars they do have. The middle class will just have to pay more taxes.
I mean the government can't do with a real budget cut, can they?
Say more about that, please.
I don't. The Consumer Price Index since 1972 is up about 180%. The price of a barrel of oil in that same time is up 1500%!
Good choice. I refuse to pay interest on anything and owe no one a cent on credit. The amazing result is I find myself with more spending power than ever.
Investment money will only flow into the US, if the companies to be invested in will be producing products that can be sold. The bottom line is that eventually the investments have to (directly or indirectly) result in exportable products that can be sold abroad to redeem those dollars. If that prospect is not on the horizon, the inflow will cease
China has been holding off problems with its own economy by exporting unemployment to the US (exporting products made with low wages in China, but not allowing US companies free access to the China market). If the US market suddenly goes sour, China will have to deal with tens of millions of its people who wll not have the funds to buy food -- a recipe for insurrection.
The Europeans, Japanese, and the Middle East are waging economic hard ball.
They apparently are doing this in concert and relishing the fall of the U.S. dollar (and look forward to the U.S. living standard being brought down as well).
Within the next twenty years, we face the threat of becoming a third-world economic power:
* The rise of the Euro dollars buying power will overshadow the U.S. dollar.
* America will increasingly shift from being an industrial power to an economy fueled largely by the less advanced and much more unstable "Services" industry.
* America will continue to export it's heavy and light industries overseas where cheaper labor is abundant.
In short, there won't be any more "Miss American Pie."
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