The US trade gap has widened to a new record high. But does it really matter?
Not much, according to a new theory from the Federal Reserve's Ben S. Bernanke
Why is everyone so very worried about the current-account deficit? Because, according to the prevailing bearish consensus, the US growth story has become far too reliant on debt-fuelled consumption of foreign goods, and its economy too dependent on foreign money to keep it afloat. America has only got away with this sorry state of affairs for so long because it is the sole economic and political superpower - and owner of the world's reserve currency. Basic economics tells us that sooner or later the US currency will crash, triggering potential economic disaster in the US, and chaos in the global economy.
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So the conventional wisdom goes. But what if this is wrong? In a new analysis that turns the prevailing consensus on its head, a group of top officials at the Federal Reserve argue that the swelling current-account deficit is not the result of "US profligacy on the part of a tax-cutting president and import-happy US consumers". Instead, the gap is due largely to what Fed Governor Ben S. Bernanke describes as a "global savings glut" that has its origins in slow-growing industrial economies such as Japan and Germany and fast-growing emerging markets such as China and India.
If Bernanke and his colleagues are right, the glut in global savings (which are all heading for America to be invested) is holding the dollar up and interest rates in the US down. This frees the federal government to run big budget deficits and lets consumers take advantage of low rates to spend more. On this analysis, the current-account deficit - albeit large by historic standards - is more than manageable, and fears that foreign funds will dry up, sparking a collapse in the dollar, have been overstated. Over the past three years, the US currency has shed 15% against the currencies of America's major trading partners. According to the Fed's theory, what's likely now is not some cataclysmic crash, but "a continuation of the dollar's gradual fall".
The "strongest evidence for the global savings surplus comes from the rapidly ageing societies of Japan and Europe", writes Rich Miller in a recent BusinessWeek article. By 2050, the US will have 34 retirees (65 years and over) for every 100 people of working age. Europe, by contrast, will have 60, and Japan a massive 78. Currently faced with a dearth of decent investment opportunities in their own sluggish economies, all these future pensioners have naturally been investing abroad, including in the US. And in the future, once retired, they will "draw down their savings and spend that money on goods and services, some of them from the US". And it's not just the richest countries that are piling up their savings; so are many emerging market countries, such as China, Korea, Thailand and Brazil.
If the optimists at the Fed are right, and the global-savings glut will tend to smooth out and reverse the US current-account deficit in the long-term, then there's no rush to cut it now. "The deficit will some day fall - not with the bang of a dollar crash, but slowly, as the rest of the world gathers the rewards of the savings it invested in America."
Yes, it most certainly does, says Bill Bonner.
US government data published this week show that America's current-account deficit rose 4.3% to a new record $61bn in February. Imports were up too, to a record-busting $161.5bn - boosted by the scrapping of textiles quotas, with shipments from China to the US rising 9.8% in February. That US businesses are more profitable than their Asian counterparts makes no difference. That the American economy is said to be the most dynamic, flexible and delicious confection ever put up on God's green earth is as irrelevant as tree rings. The fact remains, each day that passes, Americans spend about $2bn more on foreign imports than they earn from exports. Meanwhile, the media noise on the issue of America's national accounts is deafening. The world has never seen such a huge red number in international trade - $650bn last year, requiring 80% of the entire world's savings to finance it - and can't decide what to make of it. Every politician, economist, and goofball analyst with access to an editorial page seems to have an opinion. Our opinion? Almost all the commentators and policymakers are numbskulls.
It is not particularly important that the US economy is "growing faster than its competitors", as David Malpass claims in The Wall Street Journal, even if it were true. In fact, it's growing at less than half the rate of China. Nor does it matter that Asians mysteriously have no choice' but to buy US dollar assets, as other commentators maintain. And neither is it pertinent that foreign investments represent a kind of tribute' paid to the imperial power, as historian Niall Ferguson suggested recently in The New York Times.
The grim fact is that each day, Americans are about $2bn dollars richer' in SUVs, flat-screen TVs, and other consumer geegaws shipped in mostly from Asia (where the trade deficit is concentrated), while the Asians are $2bn richer in US financial assets, notably Treasury bonds.
Since 1990, foreigners have acquired $3.6trn worth of US assets as a direct consequence of the trade deficits. If the nation were a corporation, the difference between what came in and what went out would be the measure of its loss from current operations'. If it were a family, it would be the rate at which it impoverishes itself. If it were a business, running such an imbalance for so many years, it would've 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 got away with it.
In one sense, of course, Americans are merely demonstrating another consumer preference. 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. 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 - and with no savings to spend, they cannot trade a financial asset for consumer geegaws. So, they must trade a financial liability. Thus each day, collectively, people buy $2bn worth of stuff they can't pay for.
Again, we have no problem with that. But every public spectacle begins witha 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. So it is that we see almost everyday 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 busybodies point out that the US 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 - which takes 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.
What we are seeing, says Reagan administration economist Paul Craig Roberts, is the "rapid transformation of America into a third-world economy". American firms are increasingly left with only brands to market. But even those won't last forever, after customers realise that the real innovation, design and manufacturing genius is overseas.Just as car buyers took up new brands as quality increased in Japan, so they will soon take up new brands in other industries. Soon, Americans will not only want to spend on foreign-made goods, they will have to. And all the time, Americans must pay interest on their debt, or else see it compounded into more debt. Either way, day by day, the burden just grows heavier.
Bill Bonner is the American editor of Dailyreckoning.com and author of US bestseller Financial Reckoning Day
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