America's Wretched Current Account Balance Points to U.S. Dollar Collapse
With a growing chorus of financial cheerleaders proclaiming that "green shoots" are sprouting, pointing to a bottoming out of the U.S. recession, the latest trade figures from the U.S. Commerce Department reveal contrary indicators.
American exports are continuing their decline; imports are also plummeting, but not as sharply as exports, contributing to a widening trade gap. In essence, the report on April's imports and exports describes an American economy that is in continuing decline, in the context of a synchronized global recession that shows no signs of abating.
In April, the U.S. trade deficit widened to $29.2 billion. Some will maintain that this figure is not so bad, since in the period before the onset of the Global Economic Crisis, the United States had even larger monthly trade gaps. Those who play down the significance of April's trade numbers miss the most essential point.
It is a combination of both the interest payments to foreign buyers of U.S. Treasury securities and the trade deficit that defines the nation's current account deficit. With a fiscal imbalance at an unprecedented number once thought in the realm of science fiction, adding a substantial annual trade deficit at a time when America is experiencing its worst economic and financial crisis since the Great Depression jeopardizes the prospects of any sustained recovery.
The United States is already projected to have a Federal budgetary deficit of $1.8 trillion in 2009, a figure that I believe will ultimately exceed $2 trillion, or approximately 15% of America's GDP. As is well recognized, the U.S. will have to borrow much of that deficit from overseas, resulting in ballooning payments to foreign holders of U.S. government debt instruments.
Similarly, when the U.S. imports far more than it exports, the nation must pay for the resulting trade deficit with dollars. So here we have a perfect fiscal storm; quantitative easing by the Federal Reserve, massive overseas borrowing by the Federal government to pay its basic operating expenses, and massive borrowing or printing of dollars to pay for imports not covered by the net value of America's exports.
It appears that the trade deficit for 2009 will likely exceed $300 billion. When added to a multi-trillion dollar U.S. government deficit, a figure not even inclusive of state, county and municipal deficits, the result is a fiscal imbalance that is unsustainable. In short, the current account deficit is exploding, when one aggregates the quantum leap in interest payments the U.S. taxpayers will be compelled to make to overseas creditors in addition to financing the widening trade imbalance.
Typically, a nation that is experiencing a major gap in exports versus imports that is beyond fiscal prudence will have no recourse but to facilitate the devaluation of its currency. The rationale is quite simple; a cheaper currency means your consumers will buy fewer imported goods, while the nation's exports become cheaper. In normal fiscal times, that might be a prudent course to follow.
However, as strong market forces are already weakening the U.S. dollar, any policy response designed to further depreciate the value of America's currency will destroy much of the value of U.S. Treasuries held by sovereign creditors, in particular China. Yet, the U.S. trade imbalance combined with other economic and financial forces will inevitably devalue the dollar, which in turn will lead to heightened tensions between the United States and its primary foreign creditors.
It just may be that April's trade figures are a leading indicator of a pending catastrophic collapse in the value of the U.S. dollar, a fiscal calamity that will add immeasurably to the financial and economic woes of the United States and the global economy. Green shoots? More like black clouds, at least to this observer.
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We could have avoided the severe recession, soon to be depression, had the govt. allowed Wall St. and the large banks to pay for their mistakes, instead of bailing them out with money we don't have. Now, the few options remaining to fix the mess are all bad, very bad for the majority of Americans.
I agree. I believe a major economic storm is brewing.
I read this in the Economist magzine circa 1978: A guy in England 1933 takes his vacation to Taihiti. While there on vacation he spends 1000 pounds all written as drafts on his bank account back in Jolli old England. The bloke returns from vacation and waits for the checks to clear his account. He waits, hewaits, and he waits. The checks are never presented for payment. Now he's really a happy older bloke. In 1973 upon retirement he returns to Taihiti for vacation. He's now equipped with AmExp travellers checks. He has dinner at a local restaurant and when presented the bill for dinner he pays with a $100 AmEx travellers check. The receives change...and amongst the change happens to be a check he had drafted 40 years earlier endorsed "payable to bearer". The question is this: Who paid for his vacation to Tahhiti taken in 1933? There is not such thing as a free lunch. And how many "checks" floating around the world system does the USA (has the USA) benefitted from? (There is an answer to this question)
Another indicator might just be what is happening in Lativia. They
might be poised to experience an Asian style meltdown. So, do we
get Hyperinflation or Inflation if the dollar collapses?
Sheldon,
This is a much needed alarm call. But Michael Hudson has been warning about this since 1972 in his books "Super Imperialism" and "Global Fracture" and elsewhere.
The economic "success" of the American people since 1975, along with our seemingly limitless deep pockets when it comes to financing wars and military build up, has largely been an illusion built on borrowed money.
But this all calls into question a basic question of motives (yours and others): do you want for the US dollar to collapse? I hope the answer is no. So, what then? The only path I see is, for now, an attempt to restore the status quo. We are in a bind where our policy needs to be one that sustains the value of the Dollar despite the obvious downward pressure on its value. How does one do this? That is the question.
Salty,
Why do you think that cartel OPEC chose to value the sale of crude in US Dollars? Japan imports all their oil needs and must pay in dollars. (neat trick, eh?)
What was the relationship between America and OPEC under which the world is subjected to cartel pricing? (doesn't seem fair not to mention patriotic). The dollar has been partner to crooked market manipulation since the Nixon era. And we've been making out like bandits. There is no correction for us that will be tolerated by the public... this is something that will happen to us. The rooskies and the PRC do not like us for our imperial ways. Justice always comes, even our past Prsnik devious George will come to realize this.
One other reason for falling exports is that there is a sizable community of people who are consciously choosing not to buy from a country they see as a force for bad in the world. This cause of falling revenue will not respond to a recovery in other countries economies.
Perhaps Americans who claim not to care what 'foreigners' think should consider that opinion drive buying and travel decisions.
You may be interested in this site. It's cencus bureau data on trade. If you tinker around with the different topics at the top, you'll open up trade data with each country (even Cuba) with goods types and dollar amounts. It's interesting stuff.
http://www.census.gov/foreign-trade/balance/c4039.html
So this is the way we get the RMB re-valued. It's been a long time coming. Perhaps most of the rest of the national currencies will be in the same kind of shape. Iceland, Latvia, England, yada yada yada, we are all in this together. Once the RMB is expensive, China will lose its power to export cheap labor, if it hasn't already. If it's not gradual, all hell breaks loose, everywhere. No one wants that. Save for a few speculators. But even they don't want the result to follow them.
Joe,
I rmember in college (I think 1972 or so) that the "monetarist" Miltion Friedman was instrumental in floating the exchange rates vis-a-vis each other countries. It was the freedom of the market. And I agree with this point of the monetarist train of thought. It would all amount to "meaningless" however when the PRC et al mainiuplate their currencies to achieve full employment economies exporting to America and then exacerbate the problem by monetizing the debt of the American consumer. Think of it this way, it's the Opium Dens payback in a subtler more refined way.
You may have an incomplete history of how this situation all came about. If you read Michael Hudson's accounts, the floating exchange regime came about as a means of financing the ever-more-expensive Vietnam War and Cold War. Around 1971 Michael Hudson had been hired to study what would happen if we went to a floating regime, and his conclusion was that it would provide a highly addictive means of forcing other countries to subsidize our government spending in a relationship of co-dependence, but could be a disaster for the US economy if the US were ever to try to stop "cold turkey" later on. To Hudson's surprise, the Nixon administration took his analysis to be an endorsement, and ran with the idea... and the rest is history. That is why we have the national debt that we have. You cannot go through life blaming PRC for this. We have benefited as consumers for decades (I think even the walls of my house were probably made in China).
Milton Friedman wanted a New World Order, where the mega rich
controlled all business and the rest of us served their interest, and got
whatever scraps they would deem to give us. Maybe that is coming.
A little distinction amongst the terms current account, capital account, and trade balance:
http://gregmankiw.blogspot.com/2006/07/current-acccount-vs-trade-deficit.html
Henry
Thanks, this blog is good. I will put it in my favorites. For the purposes of Sheldon Filger's discussion, however, I am not sure it matters. If we have a current account deficit year after year AND a trade deficit year after year, the distinction does not change the analysis. Would you agree?
Agreed. Largely a semantics point. Think of this: When PRC (china) purchases $1trillion in U.S. Treasury Notes, this affects the capital account. They purchase our long term assets (like real estate). When the U.S. Treasury remits a 6 month interest payment on Treasury notes for the $1 trillion held by the PRC this affects the current account. But when the PRC purchases 10 Boeing 757 airplanes this affects the trade balance.
Greg "outsourcing is good for the economy" Mankiw?
gimme a break
Finally someone else noticed!
BTW, here is another scenario for you:
1. Stock market and corporate bond market start looking better
2. People around the world sell the US T-Bills they bought as "safe investments," during the crash to buy back into the stock market and the corporate bond market.
3. People who didn't sell their "safe T-bills," see their T-bills dropping in value, panic, and sell.
4. Panic sales of T-bills causes run on the dollar, dropping the value of the dollar significantly over the course of a week or less.
Granted, this is a 50% or less probablility, there is enough uncertainty still that sales of T-bills to buy stocks is going slowly right now, but T-bills are still way high, and so can only go down. If people who bought T-bills see them dropping, how will they react? Especially if they bought T-bills so that their investment would be "safe?"
Sheldon,
Were you sleeping through the Bushwa days? It was his secretary to the Treas, Snow, who stated that it was the policy of the u>S. to seek a strong dollar. Yet the PRC was manipulating otherwise market forces that would have diminished the value of the dollar and actually made the Yuan 40% or so stronger. The PRC coontinues this manipulation and why? If you knew the reason for this you'd realize the abject stupidity of the Greenspn/Bushwa days in selling out the very sovereignty of America. When the PRC takes Taiwan what will prevent the USA from its treaty commitments? Not a tough question. It's hard to imagine that we are as stupid as we seem to be.
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