Remember the Gipper? For the last twenty years, the United
States has been buying goods from other countries and exporting
debt. For the past five years, this trend has taken on epic
proportions. In the Reagan years of the late 1980's, trade was a
hot issue. It was a time when the Japanese could do no wrong.
They were buying Rockefeller Center and their cars had put
Detroit out of work.
America became a debtor nation, and its current account deficit
exceeded one percent of GDP for the first time. From 1984 to
1989, the cumulative current account deficit totaled 16% of GDP.
Over those five years, the dollar declined by half.
Comparing today's current account deficit to that of the mid
1980's is like comparing Vinnie Jones to Ralph Macchio. In the
six years from 1998 to 2003, the cumulative current account
deficit totaled 23% of GDP. That's 50% more than the worst years
of the 1980's.
The trade deficit in 2003 will be twice that of 1989, and next
year's deficit looks to be even bigger. It's a race to the
bottom.
Part of the problem is that China, from a political standpoint,
can't afford to increase the value of its currency. There is a
de facto deal between the Chinese leaders and the people. The
people will continue to make more every year, and in return they
won't overthrow the government and replace it with a democracy.
***This has historical precedents in Indonesia, Thailand, South
Korea, Japan, Singapore, Hong Kong and Malaysia. (Of course, it
only works for about 30 years before a popular uprising occurs.)
The only way China can continue its ersatz miracle of 10% annual
GDP growth is to be the exporter of last resort to America's
buyer of last resort.
If the dollar falls and the RMB goes up, the US consumer,
already carrying a massive debt load, will no longer buy those
no longer cheap Chinese goods. This will cause political
instability in China. |
