This just in: US deficit swells to 166 billion
So much for extrapolating from “cyclical” numbers. And we’re now officially above the 5% threshold that economists are always citing as where things get hairy.
Of course, they’re probably wrong about that, but that doesn’t mean we don’t have a problem.
pantom,
Nice summary - if I understand you correctly, having a trade deficit isn’t necessarily bad. But it starts to become problematic when we continue to rely on borrowed money (credit) in conducting our trade. Not only with regards to foreign investment (China buying up treasury bonds, for example - this is due to the confidence in the American dollar), but also with regards to purchasing goods (buying imports from China).
In other words (to simplify matters - and correct me if I’m wrong here), I borrow money from you and on top of that, I buy goods from you on credit. Not only do I have to repay you the money I borrowed (plus interest), I have to pay you for the goods I puchased (plus interest).
No, I don’t see that. It’s just like you going to Sears and buying stuff from them on a credit card they issued. The difference here is that Sears wouldn’t give you an unlimited credit line. In effect, Asia, especially Japan (it should be noted they haven’t bought up US assets to prop up their currency since March), China and India have been indulging in this practice, with support from smaller players like South Korea and Malaysia.
Bush’s demagoguery re Iraq has been well-noted on this board, but this economic form hasn’t been. It’s a sort-of repeat both of LBJ’s conduct of economic policy back during Viet Nam, and of Nixon’s during that same war. We broke the Bretton Woods currency agreement under Nixon, because he was unwilling to admit defeat in Viet Nam. Under Bush, we have a government that has fully realized the implications of that Samuelson quote above: we’re sending pieces of paper abroad, and they’re sending us goods. In effect, we have a license to print money from the rest of the world. Bush’s Administration is the first to take full advantage of this unlimited credit line, since it fits in with his need to demagogue his way to another term by showering money on his constituency. Like both Nixon and LBJ, he really doesn’t care what harm he does to the country, as long as he gets that second term. LBJ figured out he had failed in that mission before he humiliated himself at the polls; Bush looks more like Nixon at this point as it does look like he’ll get another term, but November will tell.
Kerry has no real idea what kind of economic problems he’ll face if he actually wins, I don’t think. Maybe Rubin & Soros are telling him; I certainly hope so, since there’s a good chance that even if he’s thoroughly prepared himself, he’ll still face a currency crisis. The stupid thing about it is that, just like the Iraq conundrum, it was entirely unnecessary. In 2000, it was easily discernable; the proof is in the aggressive manner in which Greenspan lowered rates. He knew what the outcome could be if he wasn’t aggressive; Greenspan is a gold bug from way back, so he understands both what the problem was and what the solution was. He didn’t bargain on Bush’s combination of breathtaking ruthlessness and brutality combined with equally breathtaking economic illiteracy. (to be fair, neither did I. This kind of combination of ruthlessness, brutality and ignorance is tough to see coming.) Standard issue stuff for a demagogue, though. Bush and his enablers in the Congress bear the responsibility for the hole we’re in now.
You can be certain that if a crisis comes, though, what you’ll read in the paper is how this is a “complex problem”. It ain’t. It’s real simple, and it had a real simple solution: keep to fiscal discipline while letting the Fed do its work. But as in staying out of Iraq, that solution is gone now. We are now dependent on the kindness of strangers and sheer luck to keep us from the abyss.
Luck could pull us through, though; it’s definitely underrated by pessimistic folks like myself. Keep your fingers crossed.
Half a trillion in our trade deficit, and another half a trillion a year in our federal budget, makes this “recovery” the worst one in our history. I dont see how anyone can call this a recovery when the goods and services were are producing, and the taxes that we take in, are a trillion less than what we need/buy/spend.
YOu do not have prosperity( nor a recovery) when you are another trillion dollars in debt each year.
Likewise, an individual is really not doing financially better if he is deeper in debt each year by another million dollars, year after year.
In a “real recovery”, the people, the country, get stronger, get richer, produce more goods and services, pay off debt, our currency gets stronger, many more people are employed in more jobs that pay better, our factories are producing more with more and more factories being built, etc.
Interest rates are really low right now.
There is no reason for anyone to expect that interest rates will remain low forever. It just wont happen. Interest rates will someday go back up.
If(When) interest rates go back up to 6%, 10%, 15%, or more, then it surely will not be sustainable, esp in the federal budget, and for homeowners who bought homes with variable interest rates. We simply wont be able to afford to pay the interest on the national debt, or else have really huge inflation and a big crash in the U/S. dollar.
The way I see it, the USA and China have come to a tacit agreement that the USA will allow all of its manufacturing jobs to be destroyed by China. In return, the Chinese will accept US promissory notes (bonds). The problem with this:
-the loss of jobs in the US means that young people will be forced to work service type jobs, which pay poorly and have no security. Do you REALLY want to be a 55 year old hotel chambermaid with NO benefits?
-China will try to convert its US debt into hard assets…but there is only so much US real estate and gold that the USA will allow them to buy. Wait till we have to sell Yankee Stadium to a Chinese company!
The world is awash in low-quality, low cost Chinese made goods. Europe will not accept them, and Japan, and SE Asia is locking them out as well. That leaves the USA…
Of course, we can wipe out our external debts with a nice heavy round of inflation!
With all due respect, what makes you think there is a tacit agreement? Baby this is globalization and efficient markets.
You might want to revisit the lessons of Japan in the 1980’s and look at where they are today.