Henry, I agree with your not being concerned, yet, but there is a point where the quantitative nature of the deficit turns into a qualitative shift of its nature, from being a result, it will become a cause. I don't mind when this deficit is covered by foreigners coming in and buying our markets (financials and real estate) at their tops and selling these back to us at bottoms (The Japanese were great at doing that in the 80' and then sold everything back to us in the 90' at half prices, look at the Rockfeller center for one <g>).
However, we can't rely on foreigners to always buy our peaks and sell them back to us at throughs. When the trade deficit will go above a given percentage of our own GDP (and I am not sure what the breaking point is), imbalances will appear, and any signs of weakening of the dollar, could cause massive outflows out of these assets. The way I see this, it is a ticking bomb, a short term loss of confidence in our leadership (and with Bush/Chenney warning incessantly of a recession, what should the rest of the world do, when our own leadership loses confidence in the US economy?) could precipitate an avalanche and a financial crisis. Lowering our rates, then, will only weaken the dollar further, going into a tail spin and finally reaching a new "balance point". The havoc created in the meanwhile, will be painful.
At close to half a trillion annually, or around 5% or so of our GDP, I think that the breaking point may not be far. I also think that rightly or wrongly, this figure is going to be more and more of concern to the feds. You must remember that we got here, because AG decided that to :"save" the world economy from a collapse in late 98, he decided to make the US the "demand of last resort", to Asian economies that have overbuilt their capacity. Well, that overcapacity is still there (look at Daewoo, for instance), but are we ready to serve once more as "demand of last resort" for the world?, if our monthly deficit was just $20 B as it was in 98, sure, but at $40 B? Thus, if the next Asian crisis, will not be resolved by the US importing their excess capacity of products, then how will it be resolved? That is why, IMHO, the trade deficit is moving from a result (of our prosperity) to a cause (of inability to stem a world wide recession).
Zeev |
