* Robert J. Chassell ([EMAIL PROTECTED]) wrote: > To shift to a positive trade balance, so people in the US loan > money abroad instead of borrow it, > > * which industries in the US should increase employment and production? > And by how many and how much? > > * Which should lay people off? > > * How much of an additional dollar devaluation would be needed, if > any?
If only it were that simple. The fundamental problem is that Americans aren't saving enough to support the investment needed to keep the economy growing briskly, and much of the rest of the world, especially Asia-Pacific, are saving more than they are investing in their own countries. The result is 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. And America will only buy large amounts of foreign goods if they aren't too expensive. So several Asia-Pacific countries' central banks, especially Japan and China, have been buying US Treasuries in order to keep the dollar from falling too much, thus keeping up demand for their countries' exports and simultaneously keeping American long-term interest rates low. Another component of the current account is investment income. Right now, even though the US is a net debtor nation (about 28% of GDP = 280% of exports), our investment income balance is slightly positive, since we are earning a much higher rate on our foreign investments than foreigners are earning on their US investments. The current account deficit in 2004 will be about 5.7% of GDP, almost all of it due to the trade deficit trade deficit (5.2% of GDP). This is not sustainable. Even if investment income balance stayed near 0, the trade deficit cannot be sustained if it is higher than real GDP growth. Long term real GDP growth in the US has been about 3.5%. So that is an extreme upper limit for sustainable trade deficit. Actually, it is much worse than it sounds, because in order to get the deficit under control, we either have to reduce imports or increase exports. Increasing exports enough to make a significant dent is not really possible -- as the US has switched to a service-oriented economy over the past two decades, our manufacturing capabilities have deteriorated, and worse, the rest of the world just havn't been consuming anywhere near as much as Americans. So, if we can't increase exports, we will need to reduce imports. And to do that, we need to get the American consumer to decrease consumption and increase savings, and cut unproductive government spending. To do that we have to raise long-term interest rates and probably raise taxes. Since the American consumer has been financing the spending spree of the past couple years through asset appreciation (primarily home price appreciation and refinancing), higher interest rates will cut down on consumption and reduce imports (and probably cause home prices and the stock market to fall). If US interest rates rise, then we will no longer have a surplus on investment income. If the US net foreign debt reaches 50% of GDP at a real interest rate of 2%, then the trade deficit will have to fall to 2% of GDP or lower to be sustainable (Setser and Roubini say it will need to go to 1%). For the trade deficit to fall from over 5% to 2%, long term interest rates have to rise and the dollar has to fall. This is only likely to happen in the near term if the foreign central banks stop their buying of US Treasuries to support the dollar. And of course they have two reasons not to do that: they want to keep their currencies weak so their exports are cheaper, and since they currently holder hundreds of billions of dollars, they will lose money if the dollar falls. On the other hand, the current situation is not sustainable. If the current account deficit stays at 6% of GDP (it is projected to exceed 6% in 2005), then the US net foreign debt as a percentage of GDP will grow indefinitely, until something blows up, at which point there will be a severe US and global recession as the dollars plummets, interest rates soar, and the US struggles to keep its growth rate up without foreign savings to finance domestic investment. The only hope is that the dollar can continue a steady decline and that long-term interest rates start to go up (although short-term rates rose more than 1.25% during 2004, long term rates were virtually unchanged). This is the best scenario for everyone, including Japan and China, but will they be willing to endure long, slow pain now in order to prevent a severe recession later? Let's hope so. There is a great paper about the sustainability of the US current account by Nouriel Roubini and Brad Setser that I referenced here some time ago: http://www.stern.nyu.edu/globalmacro/Roubini-Setser-US-External-Imbalances.pdf -- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
