Current account deficit of the US in 2005

[KrazyHorse]

Originally posted by One_more_turn
Why is the Dollar still rallying then?

Because it's on a break on the way down. Where is it relative to where it was 5 years ago?

I think the primary reason why the CAD is so large is because US companies manufacture everything overseas, but bank all their profits in the US.

You are wrong, sir. If they bank their profits in the US said profits are already counted in the US for the purposes of the current account balance. The primary reason the CAB is so large is an overvalued US dollar coupled with consumer stupidity in the US.

Apple doesn't manufacture the iPods in the US. It is subcontracted to some Taiwanese outfits (Honhai Precision among them) who survive on razor-thin profit margins. Meanwhile, Apple HAS TO IMPORT the iPods for sale in the US and pockets insane amount of profits. During last 2 years, Apple's cash on its balance sheet has doubled from $5 Billion to almost $10 Billion, while increasing its R&D and marketing expenses by another 60% (That's job creation!).

Any R&D and marketing done in the US will be counted in the US. Since Apple is a US company such expenditures don't figure at all. If they were a non-US company such expenditures would be counted as a service credit for the US in the CAB

Where does Apple store its profits then? I doubt the money will be in Bank of China, or Mitsubishi Bank, or HBC, or Royal Bank of Canada, or Deutsche Bank, or UBS. The money will most likely be banked in an US outfit, such as Citigroup, Bank of America, Wells Fargo, etc...

And such profit is, as I've said, already accounted for. The only money that counts against the US CAB in this whole Apple process is the amount they have to send to Taiwan for the iPods that Americans are buying.

Who gets the best deal out of the whole process?

The rest of the world is doing fine. It's you who are mortgaging your country to pay for current consumption.

[KrazyHorse]

Originally posted by One_more_turn
Shareholders, including baby boomers with fat pension plans and retirees.

US financial institutions. Their assets are growing, and assets are the most important thing to a bank.

US Government. They get cheap loans because a huge portion of the profits are invested in US TREASURIES!

This process will not break down and stay beneficial as long as US businesses can generate returns matching or exceeding investors' expectations. I sometimes get the feeling that the world is willing to lend money to the US to find solutions on some very nasty problems, with one being about how to fund retirement of an aging population.

WTF are you talking about?

You obviously have less than no clue either about what the CAB is or what a large current account deficit actually means.

[KrazyHorse]

To break it down for the simple-minded:

Apple is a US company.

Apple buys A iPods at B$ per unit from Taiwan
Apple spends C$ on R&D and D$ on marketing/operating expenses in the US
Apple sells those A iPods at E$ in the US, making a profit of A(E - B) - C - D

The US CAB records a deficit of A*B. Very simple

To finance that CAB the US sells Taiwan equities, debt instruments etc.

Everything except the initial sale of A iPods at B$ was an internal transaction which had 0 effect on the US CAB

[Serb]

"Death to bloodsucking parasites!!!"
- DinoDoc

[KrazyHorse]

Current suckage of Russia:

46

[Serb]

46?

[KrazyHorse]

74 in metric

[Serb]

74?
WTF are you talking about?

[DAVOUT]

Alan explained quite well the problem.

http://www.federalreserve.gov/boardDocs/speeches/2005/20050204/default.htm

[Imran Siddiqui]

@ KH. That was brilliant!

[loinburger]

I think I spent somewhere between 50-60% of what I earned last year after taxes, but most of that surplus will be awash when I buy a house in the summer -- the total over the course of last year and this year will probably be closer to 90%.

[Spiffor]

Re: Current account deficit of the US in 2005

Originally posted by KrazyHorse
6.4% of GDP

Edit: nm, I've just read the thread.

[DanS]

Originally posted by DAVOUT
Alan explained quite well the problem.

To quibble, I don't think Alan ever said that it was a "problem." Indeed, he said...

The dramatic advances over the past decade in virtually all measures of globalization have resulted in an international economic environment with little relevant historical precedent. I have argued elsewhere that the U.S. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity. That argument will be tested, I suspect, by possibly new twists and turns that will emerge in a seemingly ever-more complex international economic and financial structure.

[KrazyHorse]

Originally posted by Imran Siddiqui
@ KH. That was brilliant!

I usually am.

[KrazyHorse]

Now, Dan, you need to explain something to me:

You've stated before that job transfer out of the manufacturing sector is a good thing for the US

As it stands currently, the US imports around 1.4 trillion dollars worth of goods and exports 700 billion dollars worth of goods. The worldwide trade in services is of a much smaller scale than this. Perhaps 10% as big. How the **** is the US going to stop hemmoraghing money without eventually boosting its manufacturing production dramatically? How is it going to boost manufacturing production without more workers moving back into manufacturing? Productivity gains are all well and good, but they have certainly not kept up with job losses in the manufacturing sector...