us curr acct deficit
No area of the corporatist major US media’s negligence of the public’s interest exasperates me more than their total silence on the impending economic disaster facing the US. When the US economy hits the wall, it will take the rest of the world with it. Meanwhile Fed Chairman Alan Greenspan, a long-time Ayn Rand cultist, has now been given free reign by the Bush regime to institute an extremist, ideological laissez-faire fiscal and economic policy that Senator Paul Sarbanes, one of the few people in Washington with both influence and economic credentials called “playing with fire, or indeed throwing gasoline on the fire”. So essentially, Greenspan is saying that the radical experiment in economics now underway will be allowed to run its course, come what may. No matter that leading economists all over the world, including conservative economists, are shouting in alarm. The mainstream media, who don’t really understand economics issues very well themselves, don’t think viewers care enough about them to watch stories about them, and are very sensitive about upsetting the regime that supports their oligopoly and the shareholders of their holding companies who don’t want anyone blowing the whistle on market bubbles, are saying nothing, simply not covering the economy at all — they just repeat the stock market averages, the monthly government data press releases, and big corporate earnings reports, and think that’s covering their responsibility on business, financial and economic reporting.

Regular readers know I try to fill the void, with short analyses that are intelligible to the average citizen. Here I go again.

The chart above shows something called the Current Account deficit. It shows that, until the 1980s, the Current Account, which reflects the difference between what people and corporations in aggregate save and what they spend, was flat. The Current Account went seriously into deficit in the early 1980s, but was reined in again, until, during the Clinton Administration it began to spiral out of control. Under Bush’s watch, and more importantly under Greenspan’s watch, this deterioration has accelerated over the last four years, so that now it’s running at a $700 billion annnual rate, and forecast to hit one trillion dollars within the next few years, maybe even the next year.

The chart for the US Trade Deficit is virtually identical to the chart above. On an annualized basis, this deficit — the difference between imports of $1.8 trillion and exports of $1.1 trillion, is also $700 billion, heading quickly towards the one trillion mark. Petroleum products alone account for $200 billion, close to 30%, of this deficit, and that proportion is, of course, climbing at an even faster rate. The cost of oil has risen 50% almost overnight, and further increases are forecast.

What do these numbers mean? Well, the Gross Domestic Product (GDP) — the total value of economic activity — of the US is about $10 trillion per year, which is about 1/4 of the total global GDP. So the current account deficit means that Americans are spending about 10% more than they are earning each year, and importing 20% of what they consume while exporting only 10% of what they produce, and financing the difference. Meanwhile, the US National Debt (the total amount the US government owes), after levelling off during Clinton’s second term, is accelerating at an unprecedented rate, to its current level of $7.5 trillion (as much as the entire country produces in 9 months), and its Net International Investment Position (NIIP — the net indebtedness of the US to the rest of the world, is nearing $3 trillion, 30% of GDP. The US National Debt is capped, and three times Bush has had to go to Congress to get authorization to increase this cap. The situation will inevitably get worse no matter who is elected next month, so the cap, put on to safeguard against reckless spending, will have to be raised many times more in the next few years. And with Bush determined to make the tax cuts permanent, or introduce a ‘flat tax’, the National Debt is likely to accelerate further as government revenues fall. This is like your mortgage broker (Congress, echoed by the IMF) telling you your mortgage payments exceed the maximum safe proportion of your income, then you (the US Government) replying that you’ve decided to take a lower-income job, so you’ll have less money to make the payments, and then the mortgage broker (Congress) replying “OK, well, I guess we’ll allow you to increase your mortgage anyway”. This is insanely irresponsible behaviour.

But the press remains mute.

In short, the American people, corporations and government are all living well beyond their means, and borrowing at an accelerated rate to make up the shortfall. And if interest rates go up, and some economists think they could soon hit double-digits, we’re all screwed.

What are the implications of these deficits, especially considering that they are being incurred by an administration that doesn’t know or care about fiscal and economic matters, under the direction of a Fed Chairman with an ideological bent not to intervene?

  • It means the US dollar will continue to weaken, and may even collapse.
  • Wachovia’s economist says “it’s just a matter of time before foreigners will become less willing to lend to the US”. That means they will have a choice: Stop selling to Americans, or at least insist that payment be made in a stabler currency than the US dollar. “When that point is reached, interest rates will rise as foreign lending slows.” Those rising interest rates, reflecting the perceived growing risk of repayment, will increase the cost of the US National Debt proportionally, which will require the US government to cut spending elsewhere (i.e. defense and social services, and rollback tax cuts), or run the risk of bankruptcy. It’s been said cynically that that has been the neocon plan all along, but the reality is that cutting social services alone won’t do it — military adventures will have to stop, and sharp tax increases will have to be introduced as well. The alternative is to play a game of “chicken” with foreign lenders, which appears to be the Greenspan approach — let’s see how far foreign sellers will let the deficits go, before they’re willing to hurt their own economies by curtailing sales to the US or demanding they be repaid in a stabler currency. Problem is, in this game of chicken there are only losers.
  • Back in 2002, the Institute of International Economics warnedthat the Current Account deficit could rise to 7% of GDP by 2006 (it has already reached that level this year), and that only a level of 2-2.5% was sustainable — anything above 4% will trigger a continued and sustained fall in the US Dollar until that deficit falls back to sustainable levels. This suggests that despite its 25% declines in the past year, it has additional declines of 25-50% in store in the next couple of years. Now suppose you’re a foreign vendor who’s sold a billion dollars worth of goods to American consumers, secured by US Dollar loans — with the US Dollar in free fall, are you going to continue to sell when your profits are wiped out in foreign exchange losses? The answer of course is no, and when the Arabs or the Asians move to the Euro as the currency of all transactions, the game of “chicken” will be called, and the US Dollar will drop through the floor, making US debt repayment and new borrowing unaffordable (at all levels — government, corporate and consumer), precipitating a crash in US stock markets as the value of $US assets tumbles below the value of Euro debts, and hence a crash in markets worldwide as one fourth of the world’s buying power stops buying. As the IIE put it two years ago: “The United States must attract about $2 billion of net capital inflow every working day to finance the deficits at their current level. Since gross US capital outflows have been running about as large as the current account deficit, our gross capital inflows must average about $4 billion per working dayóand totaled about $1 trillion in 2000. Any decline in the level of these inflows, let alone their reversal via a selloff from the $10 trillion of outstanding dollar holdings of foreigners, would produce increases in the US price level and higher interest rates (and almost certainly a fall in the stock market as well). This triple whammy would severely hurt the US economy.”
  • In a more recent analysis, the IIE predicted a Euro soaring past $1.50 USD in value (i.e. a USD worth only 0.66 Euros). What is especially astonishing about this is that the European economies are not doing particularly well. What we are seeing is the world embracing another currency not because its supporting economies are strong, but because they are so worried about the overextension and unsustainability of the US economy and its underlying policies.
  • The Chinese currency is currently overheated, with inflation there approaching double-digit levels and threatening to lead to economic collapse. Prevailing view is that if China doesn’t immediately revalue its currency upwards by 20-25% (so much for the benefits of offshoring!), it will suffer a hard correction and severe recession. The consequences of that will be a sharp, inflationary increase in the cost of Chinese goods, and great difficulties for the many, many American companies that are now utterly dependent on cheap Chinese goods for their survival. Thanks, Wal-Mart!
  • The 50% jump in oil prices is going to start working it’s way through the economy soon. If you look at the cost of materials and overhead for many businesses: chemical companies, plastics manufacturers, agribusiness, transportation, heating utilities, asphalt companies, medi-tech and pharmaceuticals, clothing companies using man-made fibres, furniture companies, floor coverings, cosmetics, household products, paints and dyes, you’ll find that oil cost is a key determinant of their product cost. If half the cost of their products is tied to the cost of oil, expect retail prices to rise accordingly, adding inflationary pressure to the economy big-time.

US Nat Debt
What should individuals do in light of the precarious condition of interest rates, stock markets, debt levels and trade imbalances? I caution you that I’m not an investment advisor, but these actions would appear to be prudent — and the mainstream media are simply irresponsible for not telling you so:

  • Do your best to pay down debts, especially variable-rate debts, and avoid incurring new ones. I know, that’s easy to say and hard to do, but that’s the best protection against interest rate spikes and bubbles.
  • Be leery of investments in the stock market, especially in US stocks, and especially those of companies that have offshored much of their production or service to China. They’re especially vulnerable to the triple whammy: Falling US Dollar, rising interest rates, and slowing of consumer demand. That applies to investments in retirement savings plans as well.
  • If you’re exposed, as an investor from another country, to volatility in the exchange rate of the US Dollar against your national currency, consider moving your assets into those denominated in your own currency, or at least hedging your positions so if (when) the US Dollar slides further, you don’t take a bath.
  • If you’re running an American public company with cash to invest, this might not be a bad time to consider buying back your shares and going private.
  • If you’re a consumer with cash to burn, consider buying products that take oil to produce, because they’re going to go up in price; and don’t invest in the companies that make these products, because when prices start to soar, sales will plummet.

The news gets even worse. For reasons that are historical and purely political, Americans get a tax deduction for interest secured by a mortgage on their homes, but not for interest on unsecured or otherwise-secured borrowings. As a result, a horde of usurous companies have been offering unwitting American consumers, who, like their governments and corporations have been living far beyond their means, ‘consolidation’ loans that convert a bunch of unaffordable, unsecured debts into one unaffordable debt secured by their homes. The result, in tens of thousands of cases, is foreclosure on those homes when consumers, unable to afford principal repayments, let alone interest at rates that run as high as 30%, miss payments. One fourth of new US mortgages are now credit card debt consolidation loans, and victims are losing their homes at a rate of 200,000 per year. But what these hapless citizens are doing pales in comparison to the policies of Bush and Greenspan, who are doing exactly the same thing on a massively grander scale — buying and spending more than they can possibly hope to repay, and hoping the world doesn’t foreclose on them.

No wonder they call economics the ‘dismal science’.

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  1. gbreez says:

    Thanks, Dave. That was very helpful. I have become convinced that my country’s leaders are all insane. Your article adds weight to my fears. Thank heavens my dilapidated shack is paid for, though I still have to pay inflated yearly taxes on it which will probably increase in the near future as towns go broke. They can barely provide for services now.Luck to us all.

  2. says:

    Great analysis. How do you find time to research and write about these varied topics? I envy your energy.BTW, as you probably know, Alan Greenspan just delivered a speech about oil. The press interpreted the tone as optimistic, but I found the actual contents unnerving — in fact, a roundabout confirmation of the claims of the Peak Oil Crowd.Complete transcript: forum trying to decode the Greenspan-speak:

  3. Dave Pollard says:

    Bart: Thanks. When I worked with Ernst & Young I had access to a lot of excellent research on many industries as well as economic analysis and management research, which I’ve managed to keep up to date with. I can’t get over Greenspan’s arrogance, presuming to understand the oil market better than oil industry analysts that make a living doing it, and are saying the exact opposite that he is. As for his nauseating repetition of the old ‘innovation will come to the rescue’ prediction, this suggests he’s still part of the fascist Ayn Rand cult that, despite evidence to the contrary, still would have us believe that the market, the god of the corporatist elite, will somehow solve all the world’s problems. After all, it’s done such a great job so far…

  4. Mike Watkins says:

    Greenspan didn’t say anything new that hasn’t already been uttered by him or his minions.Agree with you on “innovation coming to the rescue” – that should be raising a note of panic. Unlike coal to oil, the world was not running out of coal. The world is running out of easily (and certainly cheaply) available oil.It may be that price spikes (no news to me – I write for an investment newsletter with a technical anlysis focus, but also happen to have consulted in the oil patch for almost a decade – oil keeps hitting target after target but I digress…) in crude slow demand down somewhat, but unless there is an actual reduction in the demand growth, two things will work against lower crude prices. One, tankers are booked solid. There is no spare tanker capacity. In fact there will be a reduction in tanker capacity unless single hulled vessels are allowed to operate beyond their drop dead date (environmental regulations). Second, the producers are way behind in new exploration, partly because all the easy stuff has been found. Look for increased tension between countries as this situation worsens. For example, all the noise over Sudan – is it really over genocide? Can we be that sure given the financial stakes at hand, in general? Keep an eye out for further tensions between China, India and the US (China and India are partners in Sudan oil production) — energy seems to me to be the principle potential catalyst for a major world currency (US launching it) crisis.

  5. Life Tenant says:

    Excellent post about a dismal situation. America’s current “leaders” are recklessly running the country into the ground and at least half the electorate seems perfectly happy with that. The banana Republicans are getting the banana Republic that they want.

  6. I wish I had the eyes and the attention span to read this posting…It’s just too much sickening news presented in a lucid and informed way, but so hard to digest at a certain time in life. I remember the old “consolidate your debts” game from my young married life. We consolidated all right, and ended up with one big debt, and a bunch of new little ones. My husband bailed us out by cashing our paychecks and alloting a certain amount each month to a bill or mortgage payment, by setting it aside in a white #10 envelope in our desk. Once we bailed, we never “consolidated” again…..

  7. Jon Husband says:

    Dave … hate to have to contact you this way, but I imagine your blogware pings you when you get a message. I’m at Mike mcinerney’s last night and tonight, can’t get outgoing email to work but incoming is fine.Please let me know where to meet you for lunch. I’ll also call you in the morning if there’s no email in my inbox from you tomorrow morning … cheers, Jon

  8. gbreez says:

    This member of the banana republic is not happy with things at all. Nor do I believe that others are happy with the way things are going. Look at the stock market which has always been +++ in an election year of a sitting Pres. We are breaking all sorts of market criteria this year, all of which are dismal for anyone not shorting the market. Looks to me like we are headed towards at the least a depression, or possibly a crash, or worst yet, a complete collapse of the American economy with the rest of the world to follow. But, what do I know. Geez, I hope that I am wrong.

  9. Dave Pollard says:

    Mike: That’s very useful — thanks for the ‘insider’ insight.Maxine: Wow, does that bring back memories. I remember my parents having envelopes for each expense item each month, for years. That’s how they budgeted and made sure they didn’t live beyond their means. It works. And they had a 3% thirty-year mortgage!

  10. David Jones says:

    Holding US funds? Error.

  11. Dave Pollard says:

    Thanks, Rajiv. Very useful set of links.

  12. xeo says:

    This article merely restates C. Fred Bergsten’s ideas, which he’s been selling for years at street corners to any who will listen. We all know that if you state even “The sky is falling” long enough, it may eventually happen. But in Bergsten’s time nothing he has predicted has happened.BTW if China wants to keep it’s currency artificially low and thereby sell us goods at below true market value, I’m very happy to buy. To take it to extremes: if China wants to give us goods for free, I’m very happy to take them. We’re better off for that, but they aren’t. That’s their problem.

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