THE CURRENT ACCOUNT DEFICIT MATTERS

[TexasLawyer]

Really interesting analysis...

THE CURRENT ACCOUNT DEFICIT MATTERS

Wednesday, May 24, 2006

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Those who say foreigners like to invest in the US forget an important aspect: the daily financing requirement. We don’t need foreigners to sell dollars for the dollar to fall, we just need them to buy less. Because of the current account deficit, the US has become extremely vulnerable. If we alienate foreign investors, they might just allocate some of their new investments elsewhere.

And that’s where the crux of the issue lies: do we do enough to make the US an attractive place to invest in? US companies seem to prefer deploying their large cash holdings by expanding overseas. Assume that the US economy will slow down – will foreigners be as inclined to invest in the US as they have over the past couple of years? Assume protectionist sentiment continues to increase, won’t foreigners be tempted to establish new trading channels?

We have focused many of our writings in recent months on the threat of a US slowdown and rising protectionism because we see these as instrumental warnings flags for a possible further fall of the dollar. It doesn’t matter that other countries may be less open than the United States – these countries have their own set of issues, but they do not have an $800 billion current account deficit that needs to be financed daily.

The general perception is that foreigners, in particular central banks, mostly purchase US Treasuries. In my view, any analysis that is published now and focuses on this point should include that there has been a qualitative shift in the interest of foreigners. Over the past year and a half, it has become increasingly clear that Asian governments are looking for ways to secure their future resource needs. Since then, red flags have been raised by American politicians when foreign companies want to acquire resources that may be considered of strategic importance to the US. The attempt by the state-controlled Chinese oil conglomerate CNOOC to acquire the (non-US) assets of US based Unocal caused a firestorm that caused the transaction to be abandoned.

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http://www.freemarketnews.com/Analysis/156/5028/2006-05-24.asp?wid=156&nid=5028