NY Times, February 23, 2001
The U.S. Trade Deficit Now Matters
By FLOYD NORRIS
Only a year ago, as the United States trade deficit set a record, there
were warnings that something had to give. Surely the United States could
not continue to buy $723 million a day more than it sold. The dollar would
have to decline, it was said.
The warnings were wrong. In 2000, the trade deficit grew an astonishing 40
percent, to $1 billion a day. And the dollar rose against every major
currency.
So we'll say it again. This can't go on forever. This is the year it will
stop.
Not that many appear to be worried now. Wednesday's announcement of the
record 2000 trade deficit got relatively little attention, and some even
proclaimed it to be good news. "The trade deficit is not a problem to be
fixed, but a symbol of America's global economic strength, a Good
Housekeeping seal of approval from the world's investors," said Daniel
Griswold of the Cato Institute.
After all, he said, the flip side of a huge trade deficit is equally large
foreign investments in this country. "Expanding trade deficits are almost
always a sign of economic expansion and robust investment."
The trade deficit has dipped a bit in recent months as the American economy
slowed, but there is little chance it will decline substantially this year.
The question is whether foreign investors will continue to send cash to
this country to finance it. If they don't, Mr. Griswold said, "You'd see
the dollar fall." He declined to guess how big the decline might be.
Last year investors the world over were eager to invest in the so-called
new economy, which was concentrated in this country. "More than 40 percent
of investment in U.S. corporations by foreigners has been in high-tech
areas, particularly telecom," noted Greg Jensen of Bridgewater Associates,
a money management firm. By and large, those are investments the buyers now
regret.
If equity investments in America look less enticing, how about bonds?
Foreigners now own 38 percent of outstanding Treasuries and 20 percent of
corporate bonds. But their incentive to buy more is not being increased by
the Federal Reserve's efforts to lower interest rates.
The dollar is now being supported not by the attractiveness of American
investments, but by the unattractiveness of the competition. Japan
continues to suffer more than a decade after its bubble burst. The euro has
recovered some ground, but Europe's unemployment remains high and
investment opportunities are limited. Still, it is hard to believe that the
competition is ugly enough to keep $1 billion a day flowing into declining
American markets.
If the United States fell into a severe recession, the trade deficit would
decline, but foreign investments would probably decline more rapidly. Would
the Fed raise rates to support the dollar, or cut them to help the economy?
Would Congress pass ill-advised protectionist legislation?
Alan Greenspan would not like to find out the answers to those questions.
So he is trying to sound confident about the economy while slashing
interest rates. But the markets are not cooperating. Nasdaq's best day in
history - a 14 percent gain - came the day the Fed first slashed interest
rates. Now all major stock indexes are lower than they were before the Fed
moved. Wall Street optimists are forecasting another "surprise" rate cut.
The strength of the dollar has reflected belief in the new economy. As that
belief unravels, so will the dollar's value. The Good Housekeeping seal is
in jeopardy.
Louis Proyect
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