Ominous: The US deficit vs the dollar

[bemildred]

"Doublethink means the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them." - George Orwell

The US deficit is good, because it stimulates US demand and Asian exports. The deficit is bad because it has created a massive global financial imbalance that will one day need to be balanced. I think that qualifies as doublethink.


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The United States is now borrowing about $540 billion per year from the rest of the world to pay for the overall deficit funding Americans' consumption of goods and services and US foreign transfers. This unprecedented current-account deficit is paid through direct lending and the net sales of US assets to foreign business or persons: everything from stocks and bonds to corporations and real estate. The United States imports roughly $4 billion of foreign capital each day, half of that to cover the current-account deficit and the other half to finance investments abroad. At 5.4% of GDP in the first quarter of 2004, the deficit is substantially higher than its previous record (3.5% of GDP) in 1987, when the dollar fell by a third and the stock market took its "Black Monday" plunge.


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The dollar fell approximately 42% from its peak in 1985 to its trough in November of 1990 before the current-account balance turned positive again (when the deficit was 3.5% of GDP). This is the "adjustment" Roach is referring to. And it's why Roach believes a dollar crisis could "soon" be upon us.

From the peak in this cycle, February 2002, through September 2004, the dollar has fallen only 23%. The current account is now approaching twice what it was when it finally bottomed in 1988. So if we use the current-account "adjustment" as a guide, we should multiply the 42% decline by a factor of two to determine just how far the dollar must fall before solving the current-account problem - that's 84%!

Asia Times

[1000_posts]

1. what can we do to mitigate this problem?

How about ADR (foreign stocks)?

[bemildred]

2. IMHO it's too late to "fix" it.

I think foreign investments are a good thing to think about,
but there are no guarantees anywhere that I can see.

[phantom power]

5. Buying a little gold is never a bad idea

As far as I can tell, gold has done better than any other investment since around 2000. It hit a low of somewhere around $250/oz, and current spot price is about $415/oz

Unless, of course, you consider oil.

[whistle]

3. U.S. Federal budget deficit is not the same as the trade deficit with....

...foreign trading partners is it? I know that when working people are paid in U.S. dollars when the dollar is high relative to foreign currencies, imported foreign goods are relatively cheaper for Americans, if Americans in fact want to buy the foreign made imported goods. But, when the U.S. dollar looses value to foreign currencies and there is something (goods or services) that are being exchanged that are essential for Americans to have and therefore must be bought and paid for (i.e. imported electricity, raw materials, telephone services, etc.) we pay through the nose.

[bemildred]

4. This is about the "current account" deficit.

A separate issue from the federal deficit.