NBC: An interesting perspective on U.S. trade deficit
- From: SMBalloon <smballoon@xxxxxxx>
- Date: Thu, 22 Jun 2006 21:35:45 -0400
http://townhall.com/print/print_story.php?sid=202206&loc=/opinion/columns/alanreynolds/2006/06/22/202206.html
Our capital account surplus
By Alan Reynolds
Jun 22, 2006
A recent Associated Press headline was, "Current Account Trade Deficit
Posts Unexpectedly Large Improvement." It fell by 6.5 percent. But why
assume that was an improvement? After all, the current account deficit
"improved" during every recession, and even moved into surplus during
the worst recessions of 1975 and 1980-81.
The Economist's survey of world forecasters estimates the current
account deficit will reach 7.3 percent of GDP in Spain this year and
5.6 percent of GDP in Australia. I think the U.S. current account
deficit will be about 6.5 percent, the flip side of which means that
6.5 percent of GDP measures the difference between foreign investment
rushing into the United States minus the amount of U.S. investment
flowing abroad. We have a large capital surplus, otherwise known as a
current account deficit.
What do countries with large capital account surpluses have in
common? Economic growth over the past year was 3.1 percent in
Australia, 3.5 percent in Spain and 3.6 percent in the United States.
The expected current account deficit is smaller in the United Kingdom
(2.7 percent), yet British economic growth is also slower (2.2
percent). India's current account deficit is running about 2.5 percent
of GDP. By contrast, Germany has a perpetual current account surplus
and a pathetic economic growth rate that has long been stuck close to
1 percent.
Since the third quarter of 2003, U.S. exports of goods alone have
increased at a 9.7 percent annual rate in real terms -- more than
double the 4 percent growth of real GDP -- while real imports of goods
increased at a 9.2 percent rate. The United States is a big exporter
of plastics, aircraft, specialized industrial machinery, scientific
instruments, corn, cotton and soybeans. But producing and shipping
such products requires importing oil and natural gas.
In April 2006, imported oil and natural gas accounted for 34 percent
of the U.S. merchandise trade deficit. That was not because we guzzled
more oil. The quantity of imported crude oil was 7 percent smaller
than a year earlier, yet the cost was 18 percent higher.
One of the most persistent myths about semi-free trade or
globalization is the idea that countries with trade deficits must be
losing manufacturing jobs to countries that run trade surpluses. Japan
and Germany have run chronic trade surpluses for many years,
particularly in manufactured goods, making it easy to find out if this
theory works.
From 1992 to 2005, according to the Bureau of Labor Statistics, the
number of manufacturing jobs fell by 16.3 percent in the United
States, from 20.1 million to 16.3 million. But the number of
manufacturing jobs fell by 24.1 percent in Germany (from 10.7 million
to 8.1 million) and by 27.2 percent in Japan (from 15.7 million to
11.4 million).
Chronic trade surpluses were a sign of capital flight, not industrial
might. Since 1992, industrial production has increased 11.5 percent in
Japan, 18.9 percent in Germany and 59.7 percent in the United States.
People in Japan and Germany sold goods to the United States in order
to get the dollars they must have to invest in the stronger U.S.
economy.
As long as people are free to invest wherever they like, global
balance is literally impossible. Yet several economists have made
careers out of fretting about "global imbalances." They never define
current account surpluses as "imbalances," which puts all the emphasis
on belt-tightening among vigorously expanding economies, rather than
pro-growth policies among the laggards.
In the process of advocating a Federal Reserve policy "predisposed
more toward tightening," Stephen Roach of Morgan Stanley frets, "There
is always a chance it's too late -- that America's imbalances are so
advanced, the only way out is the dreaded hard landing."
A hard landing means lower stock and housing prices, yet lower asset
prices is precisely what Roach wants the Fed to accomplish. In a
startling confusion of cause and effect, he worries the United States
must "run massive current account and trade deficits in order to
attract foreign capital." Investors are attracted to countries because
of their current account deficits?
In the words of that previously mentioned AP report, "The concern is
that the current account deficit could grow so high that foreigners
would become less willing to hold U.S. assets. If they began dumping
their U.S. holdings, it could depress stock prices, send U.S. interest
rates higher and cause the dollar's value to fall sharply."
That "hard landing" mantra seems to be the equivalent of the phrase
"Hare Krishna" for some economists, who never tire of repeating it.
But what does it mean? If foreigners "dumped" U.S. stocks and bonds,
who would they sell to and how would they be paid? If they could
somehow sell U.S. assets only to Americans, then foreign investors
would suffer a capital loss at the expense of American
bargain-hunters.
Regardless of where the buyers lived, those foreign sellers of
dollar-denominated assets would be paid in dollars -- they would have
dollar cash and the buyers would have dollar assets. Why would the
dollar fall? Not because of the current account deficit, because the
hard landing argument insists that if the current account deficit
could not be financed then it could not exist. Besides, if there were
any connection between current account deficits and exchange rate
movements, then it would be child's play to make billions by
speculating on exchange rates.
Why would those who supposedly rushed to liquidate U.S. assets in
exchange for dollar cash be eager to swap those greenbacks for euro or
yen? That might make sense if they wanted to invest in European or
Japanese stocks and bonds, yet those markets always collapse whenever
U.S. markets merely tumble. In any case, dips in the prices of U.S.
stocks make them cheaper and more attractive to world investors, not
less attractive.
What about foreign governments? Official capital inflows declined by
48.6 percent from 2004 to 2005, yet nothing noteworthy happened as a
result. The inflow of foreign official money invested in the United
States dropped from $147.6 billon in the first quarter of 2004 to just
$19 billion a year later, but the hard landing crowd did not even
notice. When foreign central banks stop buying U.S. Treasury bills and
bonds, somebody else buys them. The demand for U.S. bonds is huge, as
proven by their low yield.
There are doubtless many things worth worrying about. But the
interminable bleating about current account deficits, global
imbalances and hard landings is once again sounding remarkably similar
to fearing the sky is falling.
(end of opinion piece)
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