In two to three years it could come to a dollar crisis
When economists talk about the U.S. current account deficit, they like to quote Herb Stein.
Mr. Stein, a distinguished economist and former chairman of the President's Council of Economic Advisers during the Nixon administration, said: "If something cannot go on forever, it will stop."
The comment was made in regard to the current account deficit of the early 1980s. And he was right then. The same quote could have been applied to the tech bubble and the rally in the U.S. dollar. And it will undoubtedly hold true for the recent bond market blowout.
But what will bring down today's current account deficit, the last major bubble of the current cycle? More importantly, can it be brought down gently?
Economists are increasingly unsure.
"Experience tells us typically these things end in tears and I think the U.S. is not going to voluntarily embark on a plan to raise savings," said Jim O'Neill, head of global economic research at Goldman Sachs in London. "Therefore, it will only come when it is forced on the U.S. It is possible in the next two to three years it could come to a dollar crisis."
History is indeed littered with the burnt-out shells of countries that have suffered current account meltdowns. Think of Latin America in the 1980s and Asia in the late 1990s.
The process is all too familiar. A country starts to grow at a torrid pace, this spurs consumption and borrowing and an influx of investment from abroad. The currency soars. Pretty soon the country is borrowing beyond its means and a great chasm opens up between domestic savings and investment.
Investors, fickle as they are, suddenly lose faith, turn tail and the currency and economy implode.
The United States is not an emerging market, of course, but its adjustment in the 1980s was sharp nonetheless.
The deficit reached a peak of 3.5% but a few short years later it had vanished, thanks to a recession, a 40% depreciation in the greenback and the rise of Japan Inc., which became the new investment destination of choice.
Today, the U.S. current account deficit sits at 5% of GDP but economists expect it to go higher still. That's because the U.S. economy, as weak as it is, has better prospects for recovery than most other regions, most notably Japan and Europe.
There was a flurry of excitement in Japan last week as the stock market soared and bond yields shot higher amid tentative signs of recovery but the economy is hardly about to rise Phoenix-like yet.
Japanese investors may be tempted to dump some of their U.S. treasury holdings for Japanese bonds but they're more likely to switch to U.S. equities instead.
The debt burden to fund the widening U.S. deficit, meanwhile, will become increasingly onerous, notes Martin Barnes, editor of the Bank Credit Analyst in Montreal.
At the end of last year, U.S. net external debt was estimated at US$2.8-trillion, or 26% of GDP. In three years, it will reach US$5-trillion, or 40% of GDP, if the current account trend doesn't change.
"As the debt rises, so will the net outflow of interest, profits and dividend payments to foreigners," Mr. Barnes said. "This boosts the current account deficit even more, threatening to unleash a vicious cycle of spiralling deficits and debt."
Feeling a little déjà vu? The above quote could have come right out Canada's history books. In the early 1990s, when our foreign indebtedness soared above 40% of GDP, investors started to worry about the country going bankrupt.
One part of the U.S. current account equation has started to move in the right direction, however. The U.S. dollar has started to fall. But the drop has neither been deep enough nor is it falling against the right currencies.
Economists Avery Shenfeld and Benjamin Tal of CIBC World Markets note the greenback has depreciated about 16% against major industrialized currencies since early 2002, but these account for only 40% of the U.S. trade deficit. Against China, the Pacific Rim, Mexico and other developing countries, which account for the bulk of the trade deficit, the greenback has actually appreciated 4%.
That is why U.S. Treasury Secretary John Snow has recently upped the pressure on China -- which holds the biggest trade imbalance with the United States -- to revalue its currency.
The yuan is currently pegged to the U.S. dollar so the descent in the greenback has been mirrored by a descent in the yuan, which hardly needs to be cheaper.
But persuading China to accept a stronger currency and the weaker growth that might come with it will require an awful lot of diplomatic wrangling.
In the meantime, the current account deficit will continue to grow, making the eventual adjustment even more traumatic.
The U.S. dollar's status as the world's reserve currency makes comparing Canada in the 1990s with the United States now ludicrous, but eventually some country, somewhere, will become more attractive than a heavily indebted United States.
And investors tend to turn on a dime.
"The nightmare scenario would be if an interruption to capital flows caused a steep plunge in the dollar and U.S. equity market meltdown, pushing the economy into recession," Mr. Barnes said. "The current account deficit could shrink dramatically, but in the context of a disastrous economic and financial environment. This is not our base-case view, but it is within the realm of possibility."
Mr. O'Neill at Goldman Sachs thinks a short, sharp cleaning out of the U.S. economic system may not be so bad. The U.S. did, after all, recover from its 1980s recession.
"I would argue the inevitable is actually not that bad for the U.S.," he said. The dollar might slump but Americans would begin to save again, forming a stronger basis for an upswing that is currently in place.
"It seems to me slightly scary that the United States now lives on a model that it will never, never accept weaker economic growth, which is dangerous because that's life."
U.S. current account deficit last big bubble (artigo completo)
Surfer
18
08-07-2003 17:49
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