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US economy on the slippery slope « Previous | |Next »
March 17, 2006

The US Commerce Department recently reported that the United States' current-account deficit for 2005 was US$804.9 billion, up from $668.1 billion in 2004. In the fourth quarter, the current-account deficit was $224.9 billion, up from $185.4 billion in the third quarter. In the fourth quarter, the current-account deficit exceeded 7% of gross domestic product (GDP). Hell, that's even worse than Australia.

Some are saying that the US current-account deficit could easily top $1 trillion a year by the second half of 2006. A sobering paragraph from Brad de-Long on the US current account deficit:

This year we in the United States may import $1 trillion more of goods and services than we export. Since American citizens and residents are going to buy perhaps $400 billion of assets abroad this year, that means that our current configuration of trade and asset prices can last only as long as foreigners are willing to buy $1.4 trillion gross of American assets each year. How long will they want to do this? How long will we let them do this? ... When foreign asset purchases fall back to sales, our exports have to be priced to be as attractive to them as their exports are to us--which means a dollar 40% lower in value than it is today.

At some point, the deficit will have to correct as the US trade deficit cannot continue to widen for ever.

The US has to shift its resources to export and import-competing and supporting industries yet Ford and General Motors not well positioned to produce attractive, smaller and reliable vehicles for the overseas market. Yet Chinese economic developments continue to erode the US means of domination of the world system.

Brad Sester points out that the US:

...needs about $80b a month to finance its current account deficit ($70b for its trade deficit). That can come from the world's banks, from foreign direct investment (in excess of US investment abroad) or from the sale of long-term debt and US equities. Recently, it has come from the sale of long-term debt....So who is doing the buying? China for sure. Brazil too. They bought dollars in January to offset all the foreign hot money chasing yield in Brazil.

China is helping to prop up the US economy. Yet the US is working to create balance of power alliances to contain the growing economic and military power of China--only its not being called containment is it?

So why would the US make an enemy of someone financing its current account deficit? Why continue to bash an economic friend? The US has chosen to borrow from the rest of the world to fund its deficits and wants to dictate the terms on which the Chinese provide the nearly $800 billion in outside capital per year. The Chinese are not willing to play to those rules.

| Posted by Gary Sauer-Thompson at 12:55 PM | | Comments (0)