How/when will the US current acount deficit turn around.

[Yakk]

Currently, the US is borrowing about 665.9 billion dollars/year to fund it's economy from the rest of the world.

To put it on scale, this is roughly 6% of the US's GDP. The US's real growth rate is about 4%/year. In other words, for every 1$ of growth in the US economy over the last year, the US borrowed 1.50$ from outside it's borders (well, technically, it borrowed 1.50$ more than it lent).

This is obviously unsustainable. What I'm wondering is, when is this going to turn around? Does the US government have a plan to turn this around?

Thanks.

[Charlatan]

When another administration is elected.

[Willravel]

I agree with Charlatan, with one specification. We would have a better chance of fixing this if we have 5 or 6 parties that were main stream, instead of 2. I don't think Kerry could have fixed this problem, Bush obviously is only going to make it worsde, though I had high hopes that on the off chance Cobb or Badnarik took office, we might stand a chance.

Are we all in agreement that peak oil is not a myth? Good. We have a deadline for fixing this: when oil prices start to skyrocket and production starts to drop, we need the financial stability to stand on our own; the financial stability that does not sit on oil control.

[flstf]

I am beginning to think that the deficit will not be controlled by either one of the major parties anytime soon. There seems to be no political gain to be had by cutting spending and/or raising taxes. We are as much to blame as the polititians since they are only doing what it takes to get elected and stay in office. This will probably not change until some kind of economic disaster occurs and we stop voting for them.

[jorgelito]

You know how some countries "forgive and cancel" other countire's debt?

Why don't we do it for ourselves?

[KMA-628]

I have made mention of my opinion here several times.

Short version: TABOR (Tax Payer Bill of Rights)

It has already been tested and it works.

Gov't spending is capped and follows inflation/growth (pick your poison).

If inflation/growth goes up 3%, so can gov't spending.

If it goes down, so does gov't spending.

If it stays the same, so does gov't spending.

It is called working within a budget--something all of us do and we should require the same of our gov't.

Gov't revenue is on the rise, if spending was kept under control, the two would even out eventually.

Another idea would be Flat Tax/VAT/VST: Income redistribution aside, if Amerca became the tax-haven to end all tax-havens, companies would flock to bring their money here and we could see a tremendous amount of growth in gov't revenue.

All of this aside, nothing can be done to help until spending is controlled.

[Seaver]

To put it on scale, this is roughly 6% of the US's GDP. The US's real growth rate is about 4%/year. In other words, for every 1$ of growth in the US economy over the last year, the US borrowed 1.50$ from outside it's borders (well, technically, it borrowed 1.50$ more than it lent).

We dont borrow from outside countries to fund our government, that's not how it works. We owe it to ourselves, the interest is from those who buy government bonds. So the money isn't going anywhere but back to us when it's paid.

[KMA-628]

Originally Posted by Seaver

We dont borrow from outside countries to fund our government, that's not how it works. We owe it to ourselves, the interest is from those who buy government bonds. So the money isn't going anywhere but back to us when it's paid.

T-bills, usually.

Our economy has a history of being the most stable which makes it an attractive investment for other countries.

Other countries buy t-bills from us--we then have to pay the t-bill back when it has matured, with interest.

The money doesn't go back to us.

They were investing money in our economy, with the hopes of a decent return on investment.

[Seaver]

I wasn't aware that the government allowed foreign countries to buy government bonds or T-bills. I stand corrected.

[Yakk]

Originally Posted by Seaver

We dont borrow from outside countries to fund our government, that's not how it works. We owe it to ourselves, the interest is from those who buy government bonds. So the money isn't going anywhere but back to us when it's paid.

That 6% number is the total current account deficit.

A net amount of money equal to 6% of your GDP is moving into the USA. A good chunk of this money is in US federal government debt being purchased by Asian central banks in order to maintain the current relative currency values in huge quantities. Another large source is the US trade deficit: the US imports far more than it exports.

It means that the USA is getting a good deal from the world. At the same time, it means the USA is building up massive obligations and debts to the rest of the world.

For every 1$ in economic growth the US gained last year, it borrowed 1.5$. The US is spending itself into a hole in an unsustainable way.

What I'm wondering is, when will it turn around? What will turn it around?

There is the possibility that a massive increase in US interest rates will crash US consumer spending, and reduce imports more than it reduces exports.

This, btw, increases the cost of supporting the US government debt.

There is the possibility that Asian central banks will stop supporting the US dollar, and allow it to fall. Fewer buyers of US government debt will drive up US government debt servicing charges. It will also make importing less attractive and exporting more so.

There is the possibility that US citizens will start saving and reduce spending. This will cause the demand-based US economy to stutter, as well as doing some economic damage to nations that export heavility to the USA, and reduce the standard of living in the USA in the short term.

There is the possiblity that the US economy will start growing like gangbusters, at rates that haven't been seen since the 30s, which would solve most problems.

There is the possibility that the US will start a larger war, introduce austerity measures & rationing, and thereby curb imports.

I don't know what will happen to change the current situation. I'm just wondering if people have a clue what is likely, or what plans the government has?

[Hardknock]

Originally Posted by Charlatan

When another administration is elected.

My words exactly.

[Hardknock]

Originally Posted by KMA-628

I have made mention of my opinion here several times.

Short version: TABOR (Tax Payer Bill of Rights)

It has already been tested and it works.

Gov't spending is capped and follows inflation/growth (pick your poison).

If inflation/growth goes up 3%, so can gov't spending.

If it goes down, so does gov't spending.

If it stays the same, so does gov't spending.

It is called working within a budget--something all of us do and we should require the same of our gov't.

Gov't revenue is on the rise, if spending was kept under control, the two would even out eventually.

Another idea would be Flat Tax/VAT/VST: Income redistribution aside, if Amerca became the tax-haven to end all tax-havens, companies would flock to bring their money here and we could see a tremendous amount of growth in gov't revenue.

All of this aside, nothing can be done to help until spending is controlled.

Republicans?? Budget?? Can you say that in the same sentence???

[Seanland]

Bring Back Clinton!!! ... ... ... and Monica!

[jorgelito]

Originally Posted by Hardknock

Republicans?? Budget?? Can you say that in the same sentence???

Where does he say Republicans and budget in the same sentence? *confused*

Partisan sniping aside, does anyone know how foreign holdings of US currency affect our debt "crisis"? For example, China & Japan hold a lot, I mean alot (I don't have an exact figure handy) of US currency.

While on the surface this may seem scary, I always felt that it wouldn't be in their interest to let US $ fall (too much) cause then they would be screwed to. Sort of like a mutual interdependency. Would it be similar to the T-bills situation? How does it affect or does it affect our debt?

[Yakk]

Originally Posted by jorgelito

Where does he say Republicans and budget in the same sentence? *confused*

Partisan sniping aside, does anyone know how foreign holdings of US currency affect our debt "crisis"? For example, China & Japan hold a lot, I mean alot (I don't have an exact figure handy) of US currency.

While on the surface this may seem scary, I always felt that it wouldn't be in their interest to let US $ fall (too much) cause then they would be screwed to. Sort of like a mutual interdependency. Would it be similar to the T-bills situation? How does it affect or does it affect our debt?

This is why "it hasn't happened yet". Keeping up the massive purchase of US debt keeps the value of their holdings up.

But, if any one nation decided to turn tail, they could possibly "get out before it is too late" and cash in on their US dollars before the US dollar fell.

The problem is, if any one of them do it, the rest may follow. Resulting in a massive crash.

So, in theory, all the central banks of asia have to do is all continue purchasing US dollar debt.

The thing is, the rate at which they have to purchase US dollar debt is accellerating. And some of those nations are now exposed to US dollar fluxuations to a degree that approaches a good percentage of their annual GDP. And some of the nations are already talking about 'not selling US assets, but rather not buying them, and diversifying their holdings'.

But the US dollar is only being held up by massive institutional buying. If the institutions stop buying, the dollar stops being held up -- even holding becomes an act that will make the US dollar fall.

In other words, the Asian banks cannot keep this up much longer. I've seen estimates from 1 years to 5 years before it is no longer possible for them to keep the US dollar from falling.

Remember the stock market bubble? Everyone (well, anyone who wasn't a fool) knew that the stocks where overvalued, but everyone also knew that other people where buying the stock and the prices where going up. So long as there was a bigger fool, you could sell the stock to them, and reap a profit.

The US dollar seems to be in a game of 'bigger fool' or a bubble. The only thing keeping it up seems to be people buying the dollar in order to keep the paper value of their older holdings from collapsing.

As noted above, there are other solutions to this that I can see: a large interest rate spike, a cultural shift back to early-80s savings rates, or a real world war would probably all 'work'.

[RangerDick]

Originally Posted by Yakk

Currently, the US is borrowing about 665.9 billion dollars/year to fund it's economy from the rest of the world.

To put it on scale, this is roughly 6% of the US's GDP. The US's real growth rate is about 4%/year. In other words, for every 1$ of growth in the US economy over the last year, the US borrowed 1.50$ from outside it's borders (well, technically, it borrowed 1.50$ more than it lent).

This is obviously unsustainable. What I'm wondering is, when is this going to turn around? Does the US government have a plan to turn this around?

Thanks.

Can you give some historical perspective here? Without that, this appears to me to be simply a yelling "doom and gloom" by providing figures that sound alarming but actually mean nothing, at least not to the casual reader (or do sound alarming to the casual reader based on lack of knowledge of the mutual dependancy of the dollar to foreign currency - especially with regard to those foreign countries who have purchased US debt and whose very own economies rely on the value of the dollar.)

Foreign countries do not (by and large) purchase US debt as a long term investment strategy, hoping to collect on interest payments and receive the principle upon maturity. Rather, the intent is to hold US interest rates lower (the price of debt has an inverse relationship to interest rates btw) by purchasing it so that US companies can borrow more money, at lower rates, and in turn invest it back into that countries economy by way of purchasing that counries products.

As interest rates do inevitably rise (as they are now), the interest payments on previously issued debt sill seem meager compared to the higher interest paid on newly issued debt (therefore demand will increase for the new - interest rates will fall). Get it? It's a cyclical thing.

[RangerDick]

Originally Posted by KMA-628

I have made mention of my opinion here several times.

Short version: TABOR (Tax Payer Bill of Rights)

It has already been tested and it works.

Gov't spending is capped and follows inflation/growth (pick your poison).

If inflation/growth goes up 3%, so can gov't spending.

If it goes down, so does gov't spending.

If it stays the same, so does gov't spending.
.

At first blush, this sounds like a good idea. Where's the rub? How about when things like moblizing our armed forces and sustaining a war are necessary? When things like national security are at stake (Iraq aside), spending can't be hamstrung by what the percentage of growth was last year.

[jorgelito]

Thanks Yakk for the clarification. I've "heard" that too. I gotta tell ya, it's been lying in wait and I get an uneasy feeling regarding the "currency bubble". Another thing I don't get, if so many countries are buying US$, then why is the dollar still falling?

So let's play this out:

With the downward pressure on the dollar slow but steady, wouldn't that make our exports more "affordable" or attractive in overseas markets? At least countries that aren't pegged to us. So let's say the EU & Japan.

As US$ goes down, exports to EU & Japan go up?
Increasing revenue in the US, which leads to more production due to demand, which leads to more jobs, more revenue for state & feds? Generally speaking of course.

But, as US$ goes down, oil prices go up even more (because oil is sold/bought on the spot market in dollars)?

Help me out Econ majors or people with a better feel for number crunching...

Oh yeah, Yakk, I stumbled on this the other day. http://biz.yahoo.com/bizwk/050318/b3926054mz011_1.html

I think it will add to our discussion here. I don't have time to disseminate it with y'all, I have my last final in 5 hours andI still need to sleep and study more...AAAAAAAAAAAAAAHHHHHHHH!!!!!!!!!!!!!!

So then, after reading this article, where is the "bottom" and what does it really mean? Are things just cyclical, no big deal, or is there really a potential for financial disaster?

[n0nsensical]

Originally Posted by jorgelito

Thanks Yakk for the clarification. I've "heard" that too. I gotta tell ya, it's been lying in wait and I get an uneasy feeling regarding the "currency bubble". Another thing I don't get, if so many countries are buying US$, then why is the dollar still falling?

I'm no economist, but I imagine the dollar is still falling simply because the downward pressure as a result of the US "printing money" is SO massive that nobody else has the power to stop it.

So let's play this out:

With the downward pressure on the dollar slow but steady, wouldn't that make our exports more "affordable" or attractive in overseas markets? At least countries that aren't pegged to us. So let's say the EU & Japan.

As US$ goes down, exports to EU & Japan go up?
Increasing revenue in the US, which leads to more production due to demand, which leads to more jobs, more revenue for state & feds? Generally speaking of course.

But, as US$ goes down, oil prices go up even more (because oil is sold/bought on the spot market in dollars)?

That's the idea, and that's why other countries are trying to keep their own currencies down, but clearly the US is always going to be doing a lot more importing than exporting. As for financial disaster, I don't see it happening since the US economy is so powerful, but I wouldn't exactly start buying dollars either. After all, I believe during Reagan and Bush I (Boy, Republicans sure do support fiscal responsibility), the current account deficit as a percentage of GDP was even worse. I don't think any other country in the world could get away with what we do, heh.

[host]

One of the best pictures I have seen painted of what the trade deficit is actually in the process of doing to the U.S. and to it's currency:

<a href="http://www.kitco.com/ind/bonner/mar212005.html">http://www.kitco.com/ind/bonner/mar212005.html</a>
.........................If the nation were a corporation, the difference between what came in and what went out - in dollar terms - would be the measure of its "loss from current operations." If it were a family, it would be the rate at which it impoverished itself. If it were a business, running such an imbalance for so many years - it would have gone bankrupt long ago. Even a lesser nation would have run into trouble a long time ago. Only a nation with the world's reserve currency could have gotten away with it.

It is not particularly important that the U.S. economy is "growing faster than its competitors," as Mr. David Malpass claims (in the Wall Street Journal), even if it were true. Besides, the U.S. economy is growing at less than half the rate of China. Nor does it matter that Asians have "no choice" but to buy U.S. dollar assets, as other commentators maintain. Nor is it pertinent that the foreign investments represent a kind of "tribute" paid to the imperial power.

The grim and unyielding fact is that each day, Americans are about $2 billion dollars "richer" in SUVs, flat screen TVs, and other consumer gee-gaws that come mostly from Asia (where the trade deficit is concentrated), while the Asians are $2 billion richer in U.S. financial assets, notably Treasury bonds.
<b>
Since 1990, foreigners have acquired $3.6 trillion worth of U.S. assets as a direct consequence of the trade deficits.</b>

Individually, of course, this makes no great difference. We only bring it up to mock others who brought it up before us. A man decides for himself if he'd rather have a big TV or a Treasury bond. It is not for us to say he's made a good choice or a bad one. But Americans are not merely trading a financial asset for a consumer asset. They have few financial assets to trade. Since the Reagan administration, savings rates have dropped. People do not dip into capital in order to spend it at Wal-Mart. They dip into debt. With no savings to spend, they cannot trade a financial asset for consumer gee-gaws. So, they must trade a financial liability.

This is just another consumer preference, of course. It is no concern of ours if a man decides he wants a big-screen TV so badly he's willing to go into debt to get it. He would rather have the additional debt than forego the TV. This preference has become so wildly popular that it takes our breath away. Each day, collectively, people buy $2 billion worth of stuff they can't pay for. They will pay for it in the future. Or someone will.

Again, we have no problem with that.

But every public spectacle begins with a lie. Later it develops into mass illusion, self-congratulation, hallucination, farce and...finally...disaster. Until the disaster comes, you never know quite where you are. Because for every imbecility that comes along, there are dozens of hallucinators who are eager to put it over on people...and at least half the population is ready to believe it.

So, almost everyday we see a piece in the Wall Street Journal explaining that trade deficits are no trouble. And at a certain macro-economic level, they are no trouble at all. At least, as long as someone keeps lending money, they are no trouble. But even while the money flows...Americans get poorer every day.

Some kibitzers point out that the United States ran trade deficits for much of its early history...and that fast-growing countries always have current account deficits. After all, they are building something for the future...factories, plants, machines... all of which take capital. Then, when the factories are built, they produce earnings and profits, which are used to pay back the debt. In this instance, the debtor comes out ahead.

Oh, the flattering reverie of it...but when did you last see a factory...or refinery...or mine... under construction in America, dear reader? The last one we recall was a shiny new brewery outside Baltimore - and that must have been 40 years ago. Since then, it has gone out of business!

The distinguished economic journal, Bank Credit Analyst, based in Montreal, looks ahead and sees nothing but good news. BCA believes the information revolution has many more good things to give us. We're not aware of any benefits, yet, from the information revolution...but we're prepared to believe there might eventually be some. But information is notoriously light on its feet.

We read that more and more U.S. tax forms - which are nothing more than information - are being processed in India. And now comes word from Business Week that American companies are actually outsourcing more and more of the "information" component of modern products. They no longer go to Taiwan and ask the locals to "make this." Now, they go to Taiwan to see what the locals are making that they can sell back home. More and more, U.S. companies don't even participate at the design stage. "Many just take our products," said one Taiwanese manufacturer.

What we are seeing, says Paul Craig Roberts, is the "rapid transformation of America into a Third World economy." American firms are increasing left with only brands to market. But even those won't last forever, after customers realize that the real innovation, design and manufacture genius is overseas. Just as car buyers took up new brands as quality increased in Japan, they will take up new brands in other industries. Soon, Americans will not only want to spend on foreign-made good, they will have to.

Meanwhile, the Newman brothers, Dan and Frank, point out that the outflow of dollars is no cause for concern, because the dollars just come back to us. As we conceded yesterday, they do...or, they will. But they don't come back the same good-natured working stiffs they were when they left. Instead they come back in finer clothes, with finer manners, and with a better accent. They come back as renters. Instead of helping the average man earn a living, in other words, they make it harder for him. For now, they must be supported too. After all, interest must be paid on debt...or compounded into more debt. Either way, day by day, the burden just grows heavier.

Regards,

Bill Bonner
The Daily Reckoning

[Rodney]

One issues not brought up here yet is the fact that the oil trade is all in dollars. So foreign countries must hold vast amounts of dollars to buy and sell oil among themselves. This money is held in foreign hands and stays out of the direct U.S. economy. To a great degree, "petrodollars" support the U.S. trade deficit because these are dollars that we can spend/send abroad that will never (?) be redeemed _by us._ It's like printing money and getting away with it. The U.S. and Saudi Arabia/OPEC made the deal to trade oil in dollars back in the '70s.

If the world oil trade changed to another trading currency -- the euro, for example -- the oil traders of the world would unload their stocks of dollar inflict a major hit on our currency. Interest rates would rise and we would have to "pay as we go" for everything, like most other countries, because other countries wouldn't be accumulating our money for trade among themselves.

Interestingly, two oil-producing countries switched from dollars to euros for their oil exports: Iraq (two years before the invasion) -- and Iran. We have attacked one, and may well attack the other. Both are members of Bush's Axis of Evil. Many conspiracy theorists see a link. Apparently Venezuela also dropped the dollar for its oil exports in favor of a barter system with neighboring countries, and the gov't is very "concerned" about what's going on down there, though I truly doubt we'll invade.

[Yakk]

Originally Posted by RangerDick

Can you give some historical perspective here? Without that, this appears to me to be simply a yelling "doom and gloom" by providing figures that sound alarming but actually mean nothing, at least not to the casual reader (or do sound alarming to the casual reader based on lack of knowledge of the mutual dependancy of the dollar to foreign currency - especially with regard to those foreign countries who have purchased US debt and whose very own economies rely on the value of the dollar.)

http://www.financialsense.com/fsu/ed...2005/0302.html


As far as I am aware, the current account deficit of the USA hasn't hit 6% of GDP ever before in history.

Originally Posted by jorgelito

With the downward pressure on the dollar slow but steady, wouldn't that make our exports more "affordable" or attractive in overseas markets? At least countries that aren't pegged to us. So let's say the EU & Japan.

As US$ goes down, exports to EU & Japan go up?
Increasing revenue in the US, which leads to more production due to demand, which leads to more jobs, more revenue for state & feds? Generally speaking of course.

But, as US$ goes down, oil prices go up even more (because oil is sold/bought on the spot market in dollars)?

First of all, the peg can't hold. The forces keeping it pegged are only so strong.

US dollar goes down. It now buys less -- things in the USA (from oil to fridges to cars) get more expensive.

Exports from the US increase.

So, you'd have an inflationary economy with lots of jobs and a falling standard of living. . . If everything works out sunny.

But when the US currency drops faster, US interest rates go up. People who are in debt go bankrupt (oh wait, the US congress is about to make bankruptcy from personal debt less... forgiving), and either the banks who own the debt lose money or the people who can't pay the debt end up working for nothing but debt repayments for a pretty long time.

Wars make the workers work hard, and get little benefit for it directly to themselves. A lower dollar acts like a war: less benefits, more work.

Not so, say a number of top Federal Reserve officials. In a new analysis that turns conventional wisdom on its head, they argue that the swelling current account deficit is not the result of U.S. profligacy on the part of a tax-cutting President Bush and import-happy U.S. consumers. Rather, the gap -- which consists mainly of the trade deficit but also includes interest, dividends, and other financial payments -- stems largely from what Fed Governor Ben S. Bernanke calls a "global saving glut." The excess savings have their origins in both slow-growing industrial economies such as Japan and Germany and fast-growing emerging markets like China and India.

When someone starts turning convention wisdom on it's head, remember the new economy and the dot-com bubble.

Sure, they could be right. Maybe China will keep buying US dollar securities until it has 10 time's it's annual GDP in US treasury bills, and the rest of the world will follow suit. Or some other means for getting rid of all that debt paper will develop.

Originally Posted by Rodney

f the world oil trade changed to another trading currency -- the euro, for example -- the oil traders of the world would unload their stocks of dollar inflict a major hit on our currency. Interest rates would rise and we would have to "pay as we go" for everything, like most other countries, because other countries wouldn't be accumulating our money for trade among themselves.

Russia, last I read, was talking about trading in Euros.

[jorgelito]

Alright, I'll take a stab at it:
I think the current administration's plan is to cut spending - health, education, all the extraneous stuff, plus make the tax cuts permanent. I think the idea is that will stimulate the economy - i.e.: tax cuts leads to more spending etc which will put more revenue in the government coffers. I'm not sure there will be more job creation because aren't a lot of jibs going overseas? Not really sure what the Feds are up to.

So, now what? If the US has a "debt-repayment plan" how would that affect things? More confidence? Stabilized interest rates and currency?