The current account deficit of the United States has reached $880 billion dollars (U.S.) a year. News such as this is generally greeted with incomprehension or a yawn. This is, however, a number worth noting for its far reaching global implications.
The current account summarizes a country’s balance of commerce with other countries over the course of a year. It includes two sides---the merchandise trade side, the record of a country’s trade in commodities; and the services side, the record of a country’s flows in profits, dividends, interest payments and tourism. The U.S. runs a deficit on both sides of the current account----an enormous $837 billion deficit on the merchandise side and an additional $43 billion deficit on the services side.
The United States has had a current account deficit for decades. What makes it so important today is its scale---the American current account deficit is now equivalent to 6.3 per cent of the country’s Gross Domestic Product. Americans are importing far more merchandise than they are exporting and they are borrowing far more from foreigners than they are lending to them. In simple terms, Americans are living well beyond their means and their indebtedness to the rest of the world is rising at an exceptionally rapid rate.
The United States has long been the country with the world’s highest net debt. That debt has reached several trillion dollars and is surging. One indicator of the debt is that between them China and Japan hold well over a trillion dollars in U.S. securities.
Normally when a country runs a current account deficit over a period of years and its international indebtedness mounts, one consequence is a fall in the exchange rate of the country’s currency. Not surprisingly, the U.S. dollar has depreciated over the past couple of years against other currencies---the Euro, the British pound, the Japanese Yen and the Canadian dollar.
The problem is that with the present level of the U.S. current account and indebtedness, the dollar remains highly over-valued and ought to fall much further.
One of the reasons this has not happened as yet is that foreign central banks are loathe to allow the dollar to plunge. From the standpoint of Chinese, Japanese and other central banks, it is preferable to hold massive quantities of U.S. securities (even if the return on them is very poor) to letting the U.S. dollar drop in value. Were the U.S. dollar to crash, the American ability to import goods from abroad with reckless abandon would be halted. The enormous markets for their products that Asians, Europeans and Canadians enjoy in the United States would shrink dramatically with a sizeable impact on their economic growth rates.
With their huge consumer market, their global military and political power and their dollar---still the reserve currency of the world---the Americans have been allowed to do what no one else could get away with. But, the game of running up deficits and debts cannot go on for ever. Reckoning will come either through a long and painful process of adjustment or with a sudden shock.
One of the most important aspects of the current, and unsustainable, trade pattern is the way China and Wal Mart have combined to inflict deindustrialization on the United States. China’s trade surplus with the U.S. has now reached $200 billion a year. Through the Wal Mart outlets that dot the landscape of all regions of the United States, Chinese products are hungrily purchased by Americans. In the process, American industry and industrial employment are in steep decline.
When the present arrangement reaches the breaking point, the Chinese market in the U.S. will be scaled back, Wal Mart will loses its unprecedented corporate role and Americans will be forced to endure the painful process of paying for all the borrowing they have done. In the process, the U.S. dollar is likely to lose its privileged position as the world’s reserve currency. That role could be taken over, in whole or in part, by the Euro, a currency that is not massively overvalued.
The Euro, in contrast to the dollar, is scrupulously managed by the tight-fisted European Central Bank, a banker’s bank if there ever was one. The policies of the bank help keep European economic growth rates too low and unemployment too high. But they promise the rest of the world the benefits of a reserve currency that is not perched haphazardly on an unsustainable base of over-consumption and borrowing.
The mismanagement of America’s global position by the Bush administration has not only been military and geo-strategic. It has been economic as well---a failure, which while less immediately dramatic, may well be as consequential.
The current account summarizes a country’s balance of commerce with other countries over the course of a year. It includes two sides---the merchandise trade side, the record of a country’s trade in commodities; and the services side, the record of a country’s flows in profits, dividends, interest payments and tourism. The U.S. runs a deficit on both sides of the current account----an enormous $837 billion deficit on the merchandise side and an additional $43 billion deficit on the services side.
The United States has had a current account deficit for decades. What makes it so important today is its scale---the American current account deficit is now equivalent to 6.3 per cent of the country’s Gross Domestic Product. Americans are importing far more merchandise than they are exporting and they are borrowing far more from foreigners than they are lending to them. In simple terms, Americans are living well beyond their means and their indebtedness to the rest of the world is rising at an exceptionally rapid rate.
The United States has long been the country with the world’s highest net debt. That debt has reached several trillion dollars and is surging. One indicator of the debt is that between them China and Japan hold well over a trillion dollars in U.S. securities.
Normally when a country runs a current account deficit over a period of years and its international indebtedness mounts, one consequence is a fall in the exchange rate of the country’s currency. Not surprisingly, the U.S. dollar has depreciated over the past couple of years against other currencies---the Euro, the British pound, the Japanese Yen and the Canadian dollar.
The problem is that with the present level of the U.S. current account and indebtedness, the dollar remains highly over-valued and ought to fall much further.
One of the reasons this has not happened as yet is that foreign central banks are loathe to allow the dollar to plunge. From the standpoint of Chinese, Japanese and other central banks, it is preferable to hold massive quantities of U.S. securities (even if the return on them is very poor) to letting the U.S. dollar drop in value. Were the U.S. dollar to crash, the American ability to import goods from abroad with reckless abandon would be halted. The enormous markets for their products that Asians, Europeans and Canadians enjoy in the United States would shrink dramatically with a sizeable impact on their economic growth rates.
With their huge consumer market, their global military and political power and their dollar---still the reserve currency of the world---the Americans have been allowed to do what no one else could get away with. But, the game of running up deficits and debts cannot go on for ever. Reckoning will come either through a long and painful process of adjustment or with a sudden shock.
One of the most important aspects of the current, and unsustainable, trade pattern is the way China and Wal Mart have combined to inflict deindustrialization on the United States. China’s trade surplus with the U.S. has now reached $200 billion a year. Through the Wal Mart outlets that dot the landscape of all regions of the United States, Chinese products are hungrily purchased by Americans. In the process, American industry and industrial employment are in steep decline.
When the present arrangement reaches the breaking point, the Chinese market in the U.S. will be scaled back, Wal Mart will loses its unprecedented corporate role and Americans will be forced to endure the painful process of paying for all the borrowing they have done. In the process, the U.S. dollar is likely to lose its privileged position as the world’s reserve currency. That role could be taken over, in whole or in part, by the Euro, a currency that is not massively overvalued.
The Euro, in contrast to the dollar, is scrupulously managed by the tight-fisted European Central Bank, a banker’s bank if there ever was one. The policies of the bank help keep European economic growth rates too low and unemployment too high. But they promise the rest of the world the benefits of a reserve currency that is not perched haphazardly on an unsustainable base of over-consumption and borrowing.
The mismanagement of America’s global position by the Bush administration has not only been military and geo-strategic. It has been economic as well---a failure, which while less immediately dramatic, may well be as consequential.
2 comments:
Where are those american bond rating companies, such as Moody's, when you need them. Wow, aren't they going to start shooting their Hippos in zoos? Definitely a third-world banana republic on a massive scale, and it's time for the American public (not the corporations mind you, or the industrial-military complex)to make sacrifices, increase taxes for middle and lower classes, employment and income insecurity, and less social programs (the ones that are left in the home of the free).
Wal-Mart and Red China in cahoots eh -- I wonder what Chairman Mao would think ;)
Post a Comment