Current account deficit of the US in 2005

[DAVOUT]

Originally posted by DanS


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

I have argued elsewhere that the U.S. current account deficit cannot widen forever

Is it not a beautiful greespanian understatement of problem?

[VetLegion]

La La Lalalala

[Spiffor]

Could our economists here explain me what are the likely consequences of a continuous CAD?

I may have a problem with the terminology here (I always confuse my foreign deficits, and even moreso when the language isn't my own), but I don't really see what's the big beef with having a foreign deficit, as long as there is an internal dynamism, that makes the economy grow.

Growth (and generally speaking, wealth production) doesn't solely depends on the amount of goods and services you export. Especially when you consider a consumer market as huge as the US. That the US' immense consumer market imports more than it exports is no surprise, and I don't see what the big deal is with deficit in general.

Unless I'm confusing CAD with another one, I don't see how it means that the US "owes" 6.4% of its GNP for the last year. It merely means that the US has paid $700 bill more to foreigners than what it took from them. If the US has a sustainable internal economy, that can produce these $700 bill, I don't see where the catastrophe is.

[KrazyHorse]

Originally posted by VetLegion
If other countries let currencies float, it should all even out over time.

The only country with a significant problem on this front is China. They account for a large, though not excessive piece of the US CAD, and even were they to fully let their currency float the US would still have a very large CAD with China.

BTW. is current account deficit the same as budget deficit? IE, relating to the government spending?

Current account deficit has nothing to do with government spending, except insofar as government spending counts as much as does private spending. The US federal budget deficit measures inflow and outflow from the US federal government. The CAB measures the flow of money into and out of the US as a whole. It is comprised of 3 components:

Trade balance: the value of goods and services you export minus the value of goods and services you import

Net returns on investment: the value of returns to your residents on foreign investment minus the value of returns paid to foreigners on their investments in your country

Unilateral currency transfers: monetary gifts to your residents from foreigners and foreign aid received by you minus gifts given to foreigners by your residents and foreign aid donated by you

The US has run deficits in the first and third categories for quite some time. The return on US investments abroad has been higher than the return on foreign investments in the US, so the US is only now starting to run a deficit in the middle category as well. There is a good discussion regarding the reason behind the gap in returns on investment here: http://www.cbo.gov/ftpdocs/69xx/doc6...Investment.pdf

[MrFun]

Originally posted by VetLegion
La La Lalalala

translation . . . . .?

[DanS]

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

I think that by and large that is true. Manufacturing as a whole is lower value work than people perceive it to be. That's not to say that there aren't areas of manufacturing that are high value. So by and large, I don't think there's anything special about manufacturing as compared to other economic activity.

Do you agree with this? If so, then I will move on to the second part of your question.

[Dinner]

Originally posted by One_more_turn
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!).

Yes, job creation for someone but likely only a small portion of it goes domestically. Or have you missed all the threads about engineering and R&D facilities being built in India, Israel, China, and Russia? These changes in trade patterns (or really a continuation and intensification of the trade patterns started in the early 80's) are great for individual companies which off shore, and good for the consumers who still have jobs but bad for most other people. Certainly it does suck a lot of dollars out of the country and slows growth more then those low priced goods spark growth compared to domestically made goods.

In such an economy the ideal place is not to be a worker but instead to be in a position to benifet from the increased company profits or to have a job which can't easily be outsourced. The other jobs which can easily be moved will be moved simply because the economics of paying a Chinese or Indian engineer to do the same job for $12k vs paying an American Engineer $80k are just to compelling.

[Dinner]

Originally posted by DanS
I think that by and large that is true. Manufacturing as a whole is lower value work than people perceive it to be. That's not to say that there aren't areas of manufacturing that are high value.

Do you agree with this? If so, then I will move on to the second part of your question.

Manufacturing has gotten less economically valuable over time (compare the inflation adjusted price of a shirt in 1800 vs 1900 vs 2000) and in an ideal world it is fine to ignore such a sector and instead concentrate on higher value sectors. The world isn't ideal though. What happens if there is a major war with a country like China? That might make it difficult to import manufactured goods. For national defense reasons we need to maintain some level of a manufacturing base.

[KrazyHorse]

Originally posted by Spiffor
Could our economists here explain me what are the likely consequences of a continuous CAB deficit?

The CAD is not a cause of future ills; it is, however, an indicator of problems which will cause future ills.

The first likely (and almost certain) effect of running large, sustained CADs is the degradation of the net international investment position. A negative NIIP means that foreigners own more companies, real estate, bonds etc in your country than you own in theirs

This means that, all else being equal, there will be a net outflow of cash every year from your country as foreigners will earn more from their large investments in your country than you do from your small investments in their countries.

The worse your NIIP, the worse this outflow of cash is and the worse your future CADs will be. It's a positive feedback loop.

This cannot, however, run forever. The negative part of this feedback cycle (the part that will bring your CAB back into line) comes when foreigners who hold US equities and debt begin to see diminishing returns from their US holdings (due to overcapitalization) and increased risk (if everybody starts trying to divest themselves of US assets then the US dollar will drop, making a foreigner's US assets worth less to him). This will happen eventually. That's not a guess; that's a certainty. Running 6.4% of GDP as your CAD is not sustainable indefinitely. No economist worth anything will claim that it is. What is a guess is when this will happen, and how quickly it will happen. When it does happen, depending on the scale of the correction, it will seriously hurt US economic growth and may well trigger a recession. Since the US dollar will drop, it will become quite expensive for Americans to buy foreign-made goods. They will therefore buy less foreign-made goods (American replacements will come on line slowly, but they will be relatively more expensive than the foreign goods were previously). The overall drop in purchases of goods will harm virtually all sections of the US economy. Some will move back from the service sector to manufacturing, but there will be a net drag on job creation and on growth. This drag will exist for long enough that the NIIP will come back into line, either by running current account surpluses, or by growth diminishing the relative size of the NIIP, or by some combination thereof. The longer we wait to see a correction the worse and the longer the correction will be.

[KrazyHorse]

Originally posted by DanS


I think that by and large that is true. Manufacturing as a whole is lower value work than people perceive it to be. That's not to say that there aren't areas of manufacturing that are high value. So by and large, I don't think there's anything special about manufacturing as compared to other economic activity.

Do you agree with this? If so, then I will move on to the second part of your question.

I think that manufacturing is special in a trade context because it's easier to ship 1.4 trillion dollars of manufactured goods every year than it is to ship 1.4 trillion dollars of services every year. The service economy is largely confined to same-country activity. The parts that are not (intellectual property being one of the largest pieces) are much, much, much smaller pieces of the economy than are plain and simple manufactured goods.

[DanS]

So far it has been easier to ship $1.4 trillion in goods versus $1.4 trillion in services. Would you agree to this revision?

[KrazyHorse]

Where is the 700 billion dollars a year in excess manufacturing consumption going to come from, Dan?

You need to explain to me how services can take a big bite out of this very large imbalance.

[KrazyHorse]

Originally posted by DanS
So far it has been easier to ship $1.4 trillion in goods versus $1.4 trillion in services. Would you agree to this revision?

The scale of the two is so different that it will remain true for a long time to come. We're talking decades and decades. At the current rate the US does not have decades and decades to come up with a solution.

[DanS]

I take it you agree with the revision?

Edit: We're crossposting each other.

[DanS]

I note that services dwarf manufacturing in terms of the overall US economy. The reason why I'm insisting on the revision is that small changes in how shippable those services are could have an outsized impact on the trade deficit.