All those astute regular readers of the business press and of General Glut's Globblog already know that the January US trade figures turned in the country's second largest monthly deficit of all time and set the current account deficit for the first quarter of 2005 on a clear path to exceeding 6% yet again. Contrary to everything that liberal economists have been waiting, hoping , and predicting would be accomplished by a USD (broad dollar index) fallen 16.2% in nominal terms since February 2002 -- that is, more balanced trade -- continues to elude the world. A trade balance with China and it's unswerving renminbi, which has gone from -$83.1bn in 2001 to -$162.0bn in 2004, is of course a big part of the story.
The other part, however, is the persistently high rates of US consumption thanks to persistently low interest rates. We'll see whether higher interest rates will finally cut into US consumption and thus into the US trade deficit figures. For example, the 10-year is up to 4.5% from 4.0% just a month ago, and the 3-year is up to 3.9% steadily from 2.8% six months ago.
However, these government rates are not the really important ones. Pride of place for the American consumer has to be the 30-year FRM, which is still under 6.0% thanks to the East Asians abandoning Treasuries for agency bonds last year. If the 30-year FRM stays low, I think we won't see any real drop in the deficit.
The current account deficit was -6.2% of GDP in the fourth quarter of 2004. At the rate we're on now, we could see -7% before 2005 is in the books. And only a catastrophic drop in US consumption (read: major recession) will be able to start setting things right.