Friday, June 18, 2004

You could see this one coming a mile away. Two miles on a clear day.
The U.S. current account deficit widened more than expected in the first three months of 2004 to a new record, pushed by the growing gap between imports and exports, government data showed on Friday.

The gap in the current account balance, the broadest measure of the nation's trade with the rest of the world, increased to $144.9 billion in the first quarter from a revised $127.0 billion in the last three months of 2003, the Commerce Department said.

Economists polled by Reuters had expected the funding gap to widen to $141.0 billion in the first quarter. Fourth quarter 2003 was initially reported at $127.5 billion.
A billion here, a billion there, it gets confusing. So let's cut to the chase. The US current account deficit is back up over 5% of GDP.

During the first quarter of 2003 the current account deficit ran at 5.15% of GDP, but improved markedly to 4.51% of GDP in 2003:IV. Only the naive would have assumed that the magical mystical "self-correcting market" was doing its job, however. Now the deficit turns back the other direction, sitting at 5.06% of GDP.

That big fat current account deficit needs to be balanced by big fat capital inflows, and flow it in did. But not in a way that should give anyone comfort.

Official foreign purchases of U.S. assets rose $125.2 billion in the first quarter following an increase of $83.7 billion in the fourth. Total foreign-owned assets jumped $447.6 billion in the first quarter, after a $230.3 billion rise in the fourth.
Yes, those Asian central banks are loving the dollar once again. In just the first three months of 2004, foreign central banks bought more Treasury securities than they did in all of 2001 and 2002 combined. Of the net $125.2bn brought into the US by central banks in 2004:I, $117.2 was from Asia. And it's not just central banks. Private foreign capital bought net $59.8bn in US treasuries in 2004:I, the second highest quarterly total since records began in 1982!

If purchases of US government securities were way up, most everything else was down. Net foreign purchases of US corporate bonds fell to its lowest point since 2002:IV. Net purchases of US stocks were an anemic $4.1bn, down from last quarter's $22.8bn and still way below where they were in 2002 and before. Foreigners don't seem so keen on investing in US productive capital, either; net direct equity capital investment was at its lowest level since 1994.

Americans really are borrowing from tomorrow to consume today. When dim bulbs at the Cato Institute say there is nothing to worry about because the current account deficit is a sign of how much foreigners see the US as a great investment, they're off the mark by a long shot. Foreign capital doesn't like US stocks, bonds and FDI opportunities. It likes US government debt. If you think the $500bn budget deficit is being profitably invested for future returns, let me tell you about some real estate in Florida I could sell you. It's eat the hamburger today, but pay higher taxes and higher interest rates on Tuesday.


At 1:13 PM, Blogger Chibi said...

Now General, perhaps you can answer me this question: What's in this deal for the Asian central banks? Yes, I realize they don't want their currencies to rise against the dollar because their economies are based on exporting manufactured goods for the most part, but surely there must be a downside risk to make seemingly limitless purchase of treasuries, no? It seems that by going along with this, they increase the amplitude of any potential dollar disaster, and with all of those treasuries that they're holding being denominated in dollars, don't they risk losing a good chunk of money? Or doesn't that matter? Shouldn't they send some kind of signal to Washington that they'd like to see a bit more fiscal responsibility before things spiral out of control? Do the Asian central banks see deficits 5% of GDP as reasonable? Forgive me if my questions are ignorant, but I'm really trying to understand how this whole dynamic works on both sides and their downside risks. Thanks.


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