* Robert J. Chassell ([EMAIL PROTECTED]) wrote: > Regarding the US trade or current account deficit, Erik Reuter > <[EMAIL PROTECTED]> wrote > > ... Americans aren't saving enough.... America is borrowing money > from abroad in order to buy foreign goods. The governments of many > of the Asia-Pacific countries believe that they can only keep > their economies growing briskly if they continue to export large > amounts of goods to America. .... > > The current account deficit in 2004 will be about 5.7% of GDP .... > This is not sustainable. > > Actually, it is much worse than it sounds ... Increasing exports > enough to make a significant dent is not really possible -- as the > US has switched to a service-oriented economy .... > > This is interesting and depressing. You are saying that the US cannot > increase exports enough, so imports must eventually drop. This means > that goods that have been manufactured abroad and imported must begin > to be made in the US. Either that or the standard of living must > fall.
I think it is pretty clear that the standard of living -- at least as measured by consumption -- must fall. Americans having been living beyond their means for a while now, and it keeps getting worse. This chart of personal savings as a percent of after-tax income tells the sorry tale: http://research.stlouisfed.org/fred2/series/PSAVERT/112/Max > To prevent a drop in the standard of living, how much money will have > to be invested in the US? Over what time period? I don't see how it can be prevented. Americans need to save more to invest more, and thus consume less, if we are going to keep the economy growing at a real 3 to 3.5% in a sustainable way. Saving more means consuming less. And we need to save a LOT more. > Yes. But what if the decline is not steady? Worldwide recession. > What if (for whatever reason) non-central bank foreigners decide that > the US is not a better place for money than, say, western Europe? They already have. If you look at the article I referenced, private investment is no longer funding the current account deficit. It is really rather obvious that the US is not a good investment now for foreigners. The stock market is overvalued, real interest rates are still low, and with deficits as far as the eye can see, it is hard to imagine a sustained rise in the dollar. > Can the central banks of China and Japan intervene sufficiently to > prevent a drop of the dollar? China has so far. The yuan is still pegged to the dollar. Japan let the yen rise a bit, but is considering massive intervention again if the dollar falls sharply this year. > Will raising US Fed interest rates to, say, 6% reverse a flow away > from the US dollar for more than 2 years? You need to look at real interest rates. That's what determines whether a rational foreigner would like to invest in US bonds. I doubt real interest rates will rise much this year. Generally when the short term rates start going up, monetary velocity increases which creates an inflation spike. That, and continued expensive oil, will probably have inflation over 3% this year, possibly even 4%. So real rates may not rise much, if at all, even if nominal rates do. Actually, I think that is our best bet to get out of this mess. If we can somehow manage to hold inflation higher but in check, say at 4%, we can hopefully raise nominal rates enough to slow down this asset-driven bubble in the economy, reduce overall demand, and by keeping real rates about the same hopefully the dollar can continue a steady decline. But it all depends on China. If China lets the yuan appreciate, then the rest of Asia-Pacific will probably follow. If China doesn't let the yuan appreciate, then the rest of Asia-Pacific (much of which exports to China) will not let their currency appreciate relative to the dollar, since that would also mean appreciating relative to the yuan and making their exports more expensive in China. > (Right now, so I am hearing, an anticipated increase in US interest > rates, and corresponding drop in the value of bonds, is expected bring > foreign money to the US, thereby raising the value of the dollar. The > subsequent slowdown in the world economy is expected to hurt China, > Europe, and Japan more than the US. Do you think this expectation is > true; and if so, for how long?) As I said, I don't think real interest rates will rise much. I hope not. We need some moderate inflation. That would also possibly help with wages in the US -- low inflation tends to hold back real wage growth while being favorable for stocks and bonds. -- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
