What are the assumed problems/market outcomes of account deficits?

Discussion in 'Economics' started by let it run, Mar 14, 2006.

  1. Probably a subject that will cause a great deal of different views but really interested to hear from anyone concerning...

    1. What people believe are the key economic 'perils' of an excessive current account deficit of a major country like the US


    2. What would need to happen for markets to start trading in a way that suggested deficits are genuinely causing a problem


    3. What would happen in debt/equity markets and why?

    I know it is a bit of an ask to expect long winded replies to this but it is an important and relevant topic.

    If you want to simplify your answer, you could try shorthand such as the following which should illustrate what I am getting at:

    eg. Higher than expected Non Farm Payrolls ---> Assumed improving/better than thought economy ----> More people employed meaning more wealth circulated in economy to spend on goods/services ----> Stocks generally go up with assumed increased demand -----> Treasuries move down as they are comparatively less attractive and greater demand will theoretically result in increased inflation/interest rates.


    Widening current account deficit ---> ???
  2. Cheese


    When is a problem not a problem? If you've got a deficit (US) then somewhere else someone (Japan & Germany) has a surplus. Whose problem is it, if it is even a problem?

    Add the one biggest ingredient that the US is the engine of world capitalism and all that can happen is the surplus has to go somewhere which directly or indirectly goes back to supporting the US deficit.
  3. The account deficit is a feedback mechanism. If it stops rising, you'll want to sell everything and hope for an October,1987-style meltdown. We'll see what happens.
  4. It's a good question and i apologize in advance for my long winded-ness as I am all wound up about this shit. I know its paranoid - but I truly believe the writing is on the wall in the US. I have been participating in the markets for 30 years and am generally an optimistic person. But I am scared for the US and my family and am trying to be prepared. I get shit on a lot for my views but I don't care. I worked hard to get a little bit of money and will try to preserve it anyway possible. I feel sorry for bernacke. He has inherited a steaming pile.

    My take:

    70% of world currency reserves are denominated in USD. Pacific Rim, in particular, has huge exposire to USD. US has to sell 3 billion dollars a day in debt to stay afloat. China has stated its intention to reduce its reliance on US debt. Iran wants to start selling oil in euros - which countries like russia and china would love but will also put pressure on USD. It's a game of musical chairs. When China and the rest of the world stops buying our debt as was the case in January - the only option for the US is to print money which causes....... mucho inflationada... Speaking of which - the US has stopped publishing M3 data which is a little too enron for my tastes?? Where will this money go that was propping up the US you ask? BRIC. Brazil.Russia. India.China. Economies growing at 10%+ a year that don't have lazy overfed workforces....

    The US consumer, the ENGINE, of our economy is tapped. Record levels of consumer installment debt. Record levels of revolving loans and non revolving loans. No savings. An ageing population that will put a lot of pressure on health care costs and assorted other issues... I read last week that revolvong auto loans have decreased the interest percentage they charge by 20% because defaults are skyrocketing. Real estate is cooling. Mortgage defaults up 50% year over year in January of 2006.Fannie Mae is being downgraded. Home builkders getting bitch slapped. Bonds are cooling. Yield curve is inverting (why the fuck would you want to borrow money for 10 years at a worse rate then 2 years unless something real bad was gonna happen??) These are all hints to me.

    If US wants to keeping selling debt - which it has too to stay in business - they have to continue raising rates to make it attractive on world market to maintain that kind of risk. If they raise rates - which they have no choice but to do - they are going to murder the us economy and consumer. Specifically, the housing bubble will go POOF - which there are hints of. Fed has already admitted they can't help the US housing market and that the deficit is our biggest nightmare. This year alone - over a trillion dollars in ARM's mortgages are rolling over into an interest rate that is 2% higher and rising.

    If US don't raise rates - the dollar falls out of favour as it has quite signifigantly in past few sessions (due to hints from cpi that inflation is under control)- and you will see silver and gold do very very dirty and upwards things. Silvers at 22 year highs. Golds rocking. These are all signs that fiat currency is falling out of favour.

    I have read estimates that if US currency depreciated 30% - it would bring our trade deficit to a more sustainable level. ie - cheaper USD = higher exports and more USD coming in . However, when, and not if, this happens, US is going to be printing money faster then oprah on a ham.

    What I find interesting and mind numbing is the strength of the s&p and dow right now and rightfully so. Earnings and growth is there. The issue is the US dollar. Earnings and growth are great - but they are all denominated in dollars that are going to be worth 30-70% less real soon which is going to put a hurt on the world economy.

    You couple this with the fact that Bush is pissing off all of the Middle east and most of the world really. Seems to have no regard for anything except himself and is spending money like a drunk sailor - I just dunno.

    Anyway - as you may have sensed, I am in the bear camp on the US economy and have positioned myself accordingly. Hope I am wrong!!! In the meantime - I am going to be hiding under my desk!!

  5. BVM88


    Thanks niceneasy.
    I might add that healthy US company earnings that are underpinning the indices are merely reflecting the high level of unsustainable borrowing (and spending) that is taking place and will quickly evaporate as consumers throw in the towel en masse. What is also particularly worrisome is the historically low level of bank reserves in this period of explosive growth in the liabilities and assets of banks. As of 1/1/06 for example there was just $47 billion in reserves as a safeguard against $5484 billion in loans and leases http://www.neatideas.com/economic-indicator/index.htm Contrary to what the powers that be may want us to believe, the US economy has never been so fragile and the standard of living in the US will increasingly erode in future under the burden of the heavy borrowing from abroad that is taking place today.
  6. Chagi


    That's a pretty good summary "niceneasy", and I have to say that I'm with you on many of your speculations (though I'm a Canadian). I've been watching some of the actions of the US with growing disbelief, and I'm starting to get more concerned that the poop is really going to hit the fan in the near future (within a few years).

    Frankly, I'm glad that I live in Canada at this point, even though the US economy taking a nosedive would seriously hurt us as well. At least I don't have to worry about our currency becoming worthless in the near future...

    I don't want to divert this thread into a discussion on politics, but I will just say that if the US were to attack Iran right now, how exactly are they going to pay for it?
  7. The current account deficit is irrelevant.

    The U.S. could simply take a piece of paper and print the number "1" followed by twelve zeros, preceded by a dollar sign, and call it a bond. Then sell it to China at a premium. Now let's import tens of trillions of dollars worth of Chinese goods. When China wants to collect interest on the bond, we then (A) devalue the currency, (B) inflate the debt away, (C) raise interest rates making the bonds worthless, (D) sell them more IOUs, or (E) all of the above.

    In the end, everybody is happy. America gets to live beyond its means with the help of cheap foreign imported goods, and China gets to grow her economy at 10 percent per annum.

    In all honesty, it's China which is getting the losing end of the deal due to not allowing their currency to float. It's essentially a government subsidy. America should take greater advantage of this imbalance. Hell even try to persuade them to revalue the yuan lower.
  8. You are right. The countries which should be most worried about this should be countries which heavily export to USA and manipulate their currencies- China and Japan
  9. assuming this isn't already blatantly obvious, account deficits:

    - why do we trade with other countries? because they have things we want like bmw's and dvd players.

    - to get those things, they will want something in return

    - for a long time we provided goods and services they wanted, but unfortunately we no longer do. for a variety of reasons they provide things better and cheaper these days.

    - BUT we still have some advantages: the dollar is the world's reserve currency. and the US is a powerful military bully. and we have a long history of prosperity and a continuing perception of being prosperous. and extraordinary wealth. you combine all those and it gives us the rather unique option of simply promising to pay in the future. ie. bonds.

    - now we get what we want, give them paper, and marvel at our wonderful economy. we do nothing, provide no value, sell each other stuff, get rich on speculation and asset appreciation, and pat ourselves on the back for doing all the "thinking" while the stupid asians do all the working.

    yes, it sounds great until the stupid asians figure out what we're doing (as if they haven't already and aren't already actively executing their exit strategies)

    said another way, our current exports are:
    - inflation
    - military protection (or coercion)
    - past reputation or perception (the goodwill built up over years)
    - asset sales

    and until those run out, i suppose there really isn't an account deficit. so party on!
  10. ^ If US economy tanks, the world economy tanks. That's the beauty of it. They need us as much as we need them.
    #10     Mar 18, 2006