Business News Observations
Business News Observations is a reflection on my daily readings of the business newspapers, magazines and books. My hope is to offer some insight and a little 'big picture' to current business news. I look forward to your thoughts on these postings. Remember that an open mind and moderation in all things nurtures realistic views and a courteous tongue will attract others to your views. Jim Desson firstname.lastname@example.org
Friday, June 24, 2005
Wednesday, December 01, 2004
US trade and currency deficit – a lesson in the making
US trade and currency deficit is a lesson in the making. BusinessWeek -6Dec-2004 (http://www.businessweek.com/magazine/content/04_49/b3911032_mz011.htm) comments on the US double deficit- trade and current account. It wasn’t that long ago when the US was a lender economy to the world and China was the communist enemy. China is now a major lender to the US. The BusinessWeek -6Dec-2004 writes that:“At the heart of the dollar's difficulties is the ballooning U.S. current account deficit and the growing wariness on the part of foreign investors and central banks to finance it. Thanks in part to sky-high oil prices, the U.S. deficit looks on course to hit a record $600 billion this year. At close to 6% of America's gross domestic product, that's up from $496.5 billion last year and $421.7 billion in 2002. Economists Nouriel Roubini of Columbia University and Brad Setser of Oxford University reckon that the deficit could rise to well over $650 billion next year.” (By Rich Miller in Washington, with Jack Ewing in Frankfurt, William Boston in Berlin, Dexter Roberts in Beijing, and bureau reports Page 38)The article also points out that Treasury Secretary John W. Snow’s complaints that the US dollar’s problems lies with a lack of growth in other areas like Europe. This has a hollow ring. The US federal Government put itself in debt; Europe does not spend US Federal money. If your products are no longer marketable in slow growth countries, don’t blame your market- use ‘good ole American ingenuity’ and try something else. If the US buys more that it sells, also factoring in the various types of international debts like bonds etc., then the solution is lower government debt, both federal and state, be less dependent upon foreign investments and thus free up capital within the US.The problem, of-course, is not that simple. Whenever a country allows it currency to fall, it is either because of inefficient economic infrastructure and/or low productivity. There is always the hope that, with a devalued currency, exports will be more competitive. This lower-value could be offset by raising interest rates to continue attracting foreign investment. Unfortunately this past week, the press has reported that Asia institutions are selling US dollars which suggests that the US dollar will, given the present policies of the US government, increasingly be a harder sell.In the long term, this double deficit strategy, combined with increased federal spending and tax cuts, is not sustainable, especially with emerging problems with Medicare and pensions.Part of the problem is also the growing costs with regime changes, lead by the US, in Afghanistan and Iraq. Though the major cause of this double deficit is US based, these military actions and the so-called ‘war on terror’ make the problem worse and decease the possibilities of improvement.There is a lesson and a solution. A government needs revenues to spend on services. The current set of tax cuts should not only not be extended, but also abandoned. You can only spend more than you earn for so long. It is irresponsible and foolish to think otherwise. There is also (I am being facetious) that old notion that governments are elected to serve the people who elect them to progressively, with responsible fiscal policies, to providing the services people need to work and a business climate that provides jobs for people with substantial remuneration to allow greater quality of life and collective productivity. With a focus on people, and not an apparent preoccupation with the health and wealth of private enterprise, quality of life and productivity can be the partners in the advance of a nation and its people. At this time, the priorities and focus of the US Federal government seem to be blind to this reality.The other lesson to learn is that national economic and security problems can, in the long run, only be solved by international co-operation and agreed standards and rules. The US does not have the military ability to become involved in all of the countries in the world that are blatantly undemocratic and kill large numbers of their own citizens. On the other hand, if the nations of the world co-operative together to both fight terrorism and provide development for parts of the world that are struggling for a decent life, terrorism can be rendered ineffective and eventually powerless. The current approach US’s approach to international terrorism and the development of greater global democracy is not sustainable. The solution to both the double deficits is to join the other nations in a partnership as peers. The United Nations may be the ticket, but clearly there has to be the will and spirit of generosity to make it work. ‘Me first’ approached don’t make good partnerships nor do fiscally irresponsible fiscal governments.