Wednesday, September 15, 2004

It took them a day, but the mainstream press is finally coming around to letting us know a current account deficit at 5.7% of GDP is something to worry about.
The United States hit a record deficit of $166.2 billion last quarter in trade and capital flows with the rest of the world, the Commerce Department reported Tuesday, raising fresh concerns about the nation's overall indebtedness and prompting some analysts to warn of threats to the value of the American dollar.

With goods continuing to flood into the United States from Asia and Europe, and indications that foreign governments still view the American market as the most attractive place to sell their products and invest their money, there was little indication in the latest report that the overall imbalance is likely to diminish soon.
Of course, the big problem is that capital flowing into the US is not for the most part being "invested", at least not in a manner that generates wealth in the United States. T-bills for tax cuts is not making us richer.
"I really believe we have a disaster scenario in the making," said C. Fred Bergsten, director of the Institute for International Economics, which has long been a center for those who worry about the nation's global economic stature. "As soon as the markets see these unsustainable levels of debt, the dollar could very well crack.''

But others said the threat was exaggerated by experts whose previous warnings have not been borne out. Claude E. Barfield, resident scholar and trade expert at the American Enterprise Institute, said that he was not one of the analysts "who think the sky is falling" because of the increasing deficit.

He said that the dollar had been weakening against the euro and some other currencies, which should have a positive effect on the trade balance by the end of the year. "I don't think there is any imminent problem,'' Mr. Barfield added, "but over time we are going to have to get our macroeconomic house in order.''
OK, anybody who would believe a paid hack -- I mean, "scholar" -- at the AEI over a real academic is an idiot. Unless Michael Ledeen is your idea of a responsible intellectual . . .

And the truth of the matter is, the USD has not been weakening in any substantial manner. The nominal major currencies index is down almost 25% since January 2002, but since January 2004 the USD is actually up. The nominal broad dollar index is down a mere 12% since February 2002, up from a whole 14% down in January 2004.

Secondly, it's going to take a massive fall in the dollar to even begin to stabilize the US current account deficit, and even if it does steady, the US foreign debt load will continue to grow remarkably. And in light of massive levels of intrafirm trade and transfer pricing, who's to say a USD fall will have any noticeable effect anyway?

Third, the dollar's 32-month decline has had no discernable impact on the current account deficit. Before the slide, in 2001:IV, the current account deficit stood at -3.50% of GDP. As the dollar fell, the deficit steady grew (contrary to Barfield's fatuous claims) to -5.15% of GDP in 2003:I. And the relatively steady dollar of 2004:I-II has accompanied a swelling of the CA deficit from -4.51% of GDP in 2003:IV to today's -5.71%.

But I already told you Barfield is a moron, didn't I?


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