Massive US trade deficit - Recipe For Disaster

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gamalruach

By Tony Jones, ABC Online


The massive US trade deficit - balance soars to record 43.1 billion during first month of 2004 - A recipe for disaster?

A few quotes...

Professor Paul Krugman: Predicts the twin deficits in the US trade balance and the budget "could trigger a financial crisis."

Steve Letts: "It's largely Asia's preparedness to invest and finance US debt that's allowing Americans to keep living beyond their means."

David Wyss: "The financing that's coming in, particularly all of the money the Bank of Japan is dumping into the (bond) market ... in the long run we can't continue to borrow $500 billion a year from the rest of the world."

Steve Letts: "And if the rest of the world starts thinking the US economy is too risky, there'll be big problems."

Stephen Koukoulas: "If the money actually started to flow out, then that would be the worse case scenario.

"You'd get a currency crisis in the US dollar, ... and that's the sort of scenario a few people are talking about as something that could perhaps occur in 2005."

[add your quote here].

Sam
 
One thing that makes me wonder, haven't we had a trade deficit for years and years and years? Seems like I can remember hearing about this for the past 20 years.

If my recollection is true, then why is that so bad? I run a trade deficit with the rest of the world, for instance. As a matter of fact, if I didn't - that would mean I was spending more than I was making.
 
people have a habit of looking at the future as a projection of the present, and present trends. thats why they are not talking about the upcomming crisis.
 
A current account deficit is not a big deal at all; in fact, it is actually a sign of national wealth. But our CA deficit is too high.

It's not reallt the fault of the US in my opinion. The rest of the world has become dependant on the US importing foreign goods. Asia and Europe both need to see a strong dollar to maintain their current levels of income.

Chirac and Schroeder both mentioned that the ECB should drop rates (I think they are around 2% now) to combat a weakening dollar. We all know of the continued interventions of Japan (whose rate is very close to 0; I don't remember the exact number). Our rate is at 1%. There is little wiggle room left for the monetary policies of the major nations to work.

The CA deficit would be fixed by a continuation of a weak dollar. But, obviously, the other major players don't want to see this happen. Once the monetary route is exhausted, the dollar will be free to drop to its fair value. Japan can't keep its interventions up forever. Assuming no nation will stoop to policies unfair to the international community, we may see a push to dollar equillibrium. If this value is too low or it gets there too fast, we could see a mass exodus of foreign investment, which will cause serious global problems.

I should mention that this is a worst-case scenario. Hopefully, the global economy will improve in the next few years while the dollar continues to drop, but at a slower rate.

I really don't see the dollar dropping too much farther for a while. I think we'll see overshooting in the yen to about 100-ish, but could see a turn around from their. I have similar views with the other major currencies (a bit more overshooting then some strength).

Note: This isn't a trading prediction; rather it's just application of some fundamental currency hypotheses.
 
Quote from :

A current account deficit is not a big deal at all; in fact, it is actually a sign of national wealth. But our CA deficit is too high.

It's not reallt the fault of the US in my opinion. The rest of the world has become dependant on the US importing foreign goods. Asia and Europe both need to see a strong dollar to maintain their current levels of income.

Chirac and Schroeder both mentioned that the ECB should drop rates (I think they are around 2% now) to combat a weakening dollar. We all know of the continued interventions of Japan (whose rate is very close to 0; I don't remember the exact number). Our rate is at 1%. There is little wiggle room left for the monetary policies of the major nations to work.

The CA deficit would be fixed by a continuation of a weak dollar. But, obviously, the other major players don't want to see this happen. Once the monetary route is exhausted, the dollar will be free to drop to its fair value. Japan can't keep its interventions up forever. Assuming no nation will stoop to policies unfair to the international community, we may see a push to dollar equillibrium. If this value is too low or it gets there too fast, we could see a mass exodus of foreign investment, which will cause serious global problems.

I should mention that this is a worst-case scenario. Hopefully, the global economy will improve in the next few years while the dollar continues to drop, but at a slower rate.

I really don't see the dollar dropping too much farther for a while. I think we'll see overshooting in the yen to about 100-ish, but could see a turn around from their. I have similar views with the other major currencies (a bit more overshooting then some strength).

Note: This isn't a trading prediction; rather it's just application of some fundamental currency hypotheses.
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hanseng1: To me, this makes the most sense so far.
 
Thanks Hanseng1. If I understand correctly, the foreign governments that prop the dollar up also help to allow the Fed to continue this "inflationless" huge money expansion.

Right?
 
POSTED: 9:20 a.m. EST March 12, 2004

WASHINGTON -- The nation's trade deficit, by its broadest measure, rose to a record of nearly $542 billion in 2003.

The latest snapshot of trade activity released by the Commerce Department shows that the "current account" deficit last year was 12.7 percent bigger than the previous all-time high deficit in 2002.

The current account report is considered the best measure of a country's international economic standing because it tracks not just the goods and services reflected in the government's monthly trade reports but also investment flows.

The nation's deficit in goods was the main factor in the bigger overall deficit for 2003.

In services, the United States is running a trade surplus. It narrowed last year to $59 billion, compared to $64 billion in 2002.
 
Very short answer on this question of the trade deficit: its a mirage.

The USA is the engine of the world economy .. ain't nothing bad gonna happen. Why? Because its in the interests of Japan, Germany, Britain and any other national economy that amounts to more than diddly squat.
 
Quote from Cheese:

Very short answer on this question of the trade deficit: its a mirage.

The USA is the engine of the world economy .. ain't nothing bad gonna happen. Why? Because its in the interests of Japan, Germany, Britain and any other national economy that amounts to more than diddly squat.
More...
Cheese (very original nick btw), true what you say. However, to say that "nothing" bad is gunna happen, may be an overgeneralization however if something bad does happen, you are right, it IS in the best interest of all other nations who are in bed with the USD to quickly procure remedy for the USD.

Good point!

Sam
 
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