Some of you (i.e. Slith) may have noticed that I have been worried about the US current account deficit for some time now.

I note that this issue has now made it onto the front page of the business section of the New Zealand Herald as its impact is starting to be more obvious over here.

http://www.nzherald.co.nz/index.cfm?c_id=3&ObjectID=9001639

These paragraphs summarise the story (and what I have been saying for ages):

The US dollar is sliding because of its current account deficit. That is the gap - more of a gaping chasm - between what the US earns from the rest of the world through trade and investment, and what the rest of the world earns from it.

Put another way, Americans are spending too much and saving too little.

Rather like New Zealanders.

But unlike New Zealand, it is not just households that are running on credit. It is the Government too.

The federal budget deficit accounts for about two-thirds of the current account shortfall, which is running at US$665 billion ($927 billion) a year.

So the US has to attract nearly US$2 billion a day of other people's savings to finance the shortfall. and

Morgan Stanley chief economist Stephen Roach, writing in the New York Times last week, put it in more apocalyptic terms.

"The day could come when foreign investors demand better terms for financing America's spending spree and savings shortfall. That is the day the dollar will collapse, interest rates will soar and the stockmarket will plunge," he said.

"In such a crisis, a US recession would be a near certainty. And the rest of an America-centric world would be quick to follow." Is this something that any of you from the USA (or elsewhere) care about? Or is it still just me?

There are some aspects of international finance that I find interesting. The United States is the world's leading recipient of investment. When a foreign business, government, or rich individual has money to invest, they do so in America because it is profitable and safe. We have a relatively scrupulous government and relatively fair trading laws. We also have an educated citizenry (for the time being at least...) and motivated workers.

But where do all those dollars for investment come from? They come from Americans buying foreign products. The money sent to Asia for that nice DVD player (my goodness, I first wrote VCR) returns as investment capital. Sometimes it is done in rather obscure ways...for example, the housing boom in America is largely funded by China...they put up the money for loans and do so at a slightly lower rate than competitors, thus the interest rate stays low.

Here is where it gets interesting. Some countries, primarily Japan, but others as well, are so dependent upon the dollar that they cannot effectively trade with them anymore. Japan has such a huge stockpile of American currency that if they decided to sell off some, the value of the dollar would plummet and their remaining stockpile would be worth significantly less.

If the value of the dollar collapses, then the investment stream from around the world will end. All these countries have stockpiles of currency that they invest with...if that stockpile is worth less, they must get more profit from their investment. That means less investments, which means higher interest rates, which means slow economy.

Be careful...if you see the value of the dollar slipping...it is going to be big trouble for everyone, but mostly Americans of course.

Late Night Thinker - you echo my own thoughts. It is a bit of a vicious cycle which does my head in when trying to think about it, but maybe this is why the US dollar has only been falling slowly over the past year when all logic would tell suggest it should be plummetting like a rock.

It's like that old saying: "if you owe the bank $1,000 you're in trouble, but if you owe the bank $10 million then the bank is in trouble". All those foreign (read: Asian) countries who have lent all this money to the USA cannot afford to keep trading with the USA but also cannot afford to stop trading with them.

But it all has to end somewhere. It can't go on like it has for the last 10 years forever. This is why I am astonished when people say that George W. Bush has done a reasonable job with the economy.

I also think the chance of economic ugliness is dangerously high. Right now, a cartoon sketch of the world economy would show Asia overproducing, Europe sitting on its thumbs, and America sucking in foreign goods like a vacuum cleaner. One benefit the US has is that it can pay down its massive debt with US dollars: as the debt grows, the dollar falls, and the US can pay its debt back with deflated currency. However, the consequences of this for US's creditors are obviously problematic.

Aside from the falling dollar, pay attention to the credit markets, and in particular, the housing market. IMO, the US stock market will keep bouncing around in range as it has for the last few years until something spectacular happens in the housing market, and I'm particularly thinking of gov't sponsored mortgage brokers like Fannie Mae and Freddie Mac. A rapid tailspin in US housing prices could signal catastrophe for world markets...

Bion, agreed. I would wager that much of the illusion of wealth that many Americans feel (despite record high consumer debt levels) is based on inflated housing values arising from the recent property boom. As this boom has been fueled mainly by the E-Z credit handed out by the likes of Fannie Mae and Freddie Mac you can see why Greenspan has been so reluctant to raise interest rates. The more my meagre economic brain thinks about this and reading your comments, the more this looks to me like a teetering house of rickety cards.

this boom has been fueled mainly by the E-Z credit handed out Well, as far as I know, consume-credits (translation?) have grown to one of the biggest earning branches of banks over there in the last decade (or over here, as it's banks from here that lend money and later evict people there?). More so, as they don't have no laws against usury in a consume-credit-law, like most other countries do. If someones misses the due-date, interests can raise to 30%. Funny, ey. I've read it in an article last week, about with what kinda businesses our banks spend their time in foreign lands. Of course, also a reason why the Americans have a devicit in capital earnings (translation ?), as they lend money from foreigners for their private needs.

Right now, a cartoon sketch of the world economy would show Asia overproducing, Europe sitting on its thumbs, and America sucking in foreign goods like a vacuum cleaner. Well, the delicate game between the east-asians (mainly China and not Japan, China still refuses to deflate the Yuan in comparision to the US-Dollar (excluded meaningless little compromise reached lately)). But the Europeans have the opposite situation. While domesticly, most Europeans don't consume much, it's still the biggest exporting continent. But, on the bright side, the trade surplus is not with the Americans, that means we will not be so much directly hit throught the coming US-financial-crisis, the indirect consequences will cut our throats. Isn't that nice!

@Iago: if Germany gets more squeezed by a faltering global economy, will it bring more pressure to bear on Alpinistan and Luxembourg to make their banking laws more transparent (and so, to make it harder for wealthy Germans to hide money from taxation there)? And what do you think would happen to Alpinistan and Luxembourg if their banking laws were brought in line with EU standards?

Iago - good point about China. Their refusal to float their currency must be having a huge artificial impact on exchange rates although my brain has a hard tim trying to work out the downstream impacts if (or when) they decide to set the yuan free from the dollar.

I suspect there may be some rocky times ahead and some people may need to tighten their belts (especially those with a load of consumer debt). But, hey, what do I know?

Late Night got a significant portion of it.

I will also remind people that the United States of America has no southern, nor Northern, border. I'm not exaggerating. I'm not using a metaphor. And I'm certainly not lying.

There is an enormous amount of cash that goes to Columbians to buy Ak-47's and RPG's, as well as Saudis and our urban gangs. I can't even remotely give you a figure, but I would not be the least bit surprised by 20% of our GNP.

Bear in mind that the Euros guard their borders well. Your immigration laws are extremely strict, and your overall economic strength is balanced because you'd have people swimming the Channel, if the Pound was trading for 50,000 Francs. America has that problem, and they come from round the world.

The only thing you can pray for is a gentle slowdown...

Iago: if Germany gets more squeezed by a faltering global economy, will it bring more pressure to bear on Alpinistan and Luxembourg to make their banking laws more transparent (and so, to make it harder for wealthy Germans to hide money from taxation there)? And what do you think would happen to Alpinistan and Luxembourg if their banking laws were brought in line with EU standards? He, the Luxembourgians have a sweet deal with the EU already, they don't have to worry. But the days of the Channel-Islands and Austria and Alpinistan are counted. But the Alpinian biggies, UBS and CS have long left Switzerland and moved to New-York, Frankfurt and London. The big bunch businesses and employes they have are in foreign countries. They're laying of people here since I can remember. They only have small fragments left, and this will be gone in about a 10 years, with about a further 40'000 lay-offs in Geneva, Bâle and Zwingi-City. The rest that stays here will for foreigners only provide "high-tech" private and instutional investment, focussing on product quality.

But really, the only banks that matter to me are the cantonal banks and the district banks, which have huge domestic importance, as the big private banks have left the country already. Ha, if you ask me, I don't have no problem with a deal with the EU, as long it leaves the rights and liberties of Swiss citizens untouched (he, got a long history in that, want to see it continue another 700 years).

And by the way, while banks are propably the best known things about Alpinistan, are wealth stemmed from being at the head of European industrialization in the last century. We still got are high-tech and chemicals pillars. Not to say that if you can build bridges in the alpes, you can build them anywhere. And their of course are those snow-on-top-mountain-thingie addicted tourists, mainly from Japan, India and recently China.

And having had the libral party in power for about 150 years, checked by the catholic party... made Zug a libertarian paradies, true. It's not our fault that other countries have so high taxes. By the way, our tax systems is a tad-bit complicated, as taxes are mainly a cantonal matter, and there is a difference in taxation between Lucerne, Glarus and Schwyz as there is one between Ireland, Portugal and Sweden.

But it all went downhill since those commies created the social-security program and gave women the right to vote.... women... the right to vote... commies... the end of western civilization... women.... the right to vote... bah...

Hah, and Germans. They are already immigrating her in masses, being the biggest foreigner community, outpacing former-Yugoslavians and Italians. Indeed, in the desert that was formerly known as East-Germany, they fight the ragin unemployment through govermental unemployment agencies, that adivse the people to emmigrate to neighbouring countries like Switzerland. But the Germans are suffering mainly from two home made problems. They killed they're infrastructure through neglecting it in the 70s and 80s, let their schools go to waste, because they judged it wasn't necessary to put money in them. And than they wasted all their reserves by dumping it in to the black-hole of the re-united counties.

Germans... You know, the joke is, they are sent off here, but they don't get told that the clocks tick differently here. Teutons don't realize that helvetics do things differently, and there is more than a cute unintelligible dialect that hase to be gapped.

[ December 07, 2004, 17:45: Message edited by: Iago ]

But it all went downhill since those commies created the social-security program and gave women the right to vote.... women... the right to vote... commies... the end of western civilization... women.... the right to vote... bah... I just *knew* you were an Appenzeller! Do you yodel?

Luxembourg also seems to be diversifying itself by hosting all of the EU governing organizations that France and Germany won't let eachother have. Last time I was there, they were building for EU organizations like mad, and they plan to double their population in 15 years or so. They all think this might spell the end of their (boring) way of life.

Not that I'll be going there again any time soon, with the euro heading towards $1.50.

I just *knew* you were an Appenzeller! Do you yodel?

Nidwaldner, Nidwaldner. Yes, that's the downside of not having been invaded by the Germans and having therefore been enlighted by Prussian law, restored to its former glory and kept, like the rest of Europe.

Luxembourg also seems to be diversifying itself by hosting all of the EU governing organizations that France and Germany won't let eachother have. Last time I was there, they were building for EU organizations like mad, and they plan to double their population in 15 years or so. They all think this might spell the end of their (boring) way of life.
All pan-European institutions are built on the scars going through Luxembourg, Belgium and Elsace-Lorraine. Being polyglot is a often underestimated virtue.

Hmm, until I read this thread, I never knew that the US current account chasm was all the fault of the Swiss banks. The things you learn on the Boards O' Magick......