| Randy, the US "savings rate" is between 2 and 3 percent of income. Americans do not save enough to finance the borrowing needs of the US, so we rely on foreigners who are far more inclined to save money than to spend it. Japanese people (individuals, not the Japanese government) have roughly ten trillion dollars in savings -- not necessarily held in dollars, but to put a number on it. In Asia it is common to save from 20% to 25% of your income, compared to our 2% to 3%. They are savers and creditors, we are debtors and spenders. We have both large individual debt and large national debt. They have large savings accounts and tend to run large current account surpluses, although the latter is not always the case. At the margin, they finance our purchases and they supply a considerable amount of what we buy. This adds up over time, and when all debt is reckoned, we are now a debtor nation -- we are the 800 pound gorilla of debtor nations -- to the tune of trillions of dollars. This debt must be serviced via interest payments, and we borrow money to do that as well. The current account deficit, which is the broadest measure of our international trade accounts, is running at about negative $500 billion per year. That is the gap that we must fill to balance our books. To the extent that we fail, our dollar is worth less -- we can print more money but it does not have the same effect as finding creditors to cover the deficit. Simply printing more money dilutes the value of the money on international markets. In the last two years we have been failing badly and the dollar has plunged against the euro and declined against other currencies. Gold has been tracking this decline, with the shift in the value of the dollar accounting for almost all of the run-up in gold from 270/ounce to 430/ounce a couple of days ago. The concern is that the current account deficit is a potential time bomb whose time might be coming soon -- the current account deficit is so huge and chronic that it might cause our credit to dry up, leaving us with few if any good alternatives but to watch the dollar crumble, or sharply raise interest rates to defend the dollar. This may or may not happen as a catastrophic plunge in the dollar, but it is a very real concern. The direction of the dollar, long-term, is likely to be down. A lower currency translates into a lower standard of living, despite all the BS about how it is "good for the economy". It is good for the economy in the same way that a huge cut in everybody's compensation is "good for the economy". Bob says the current account deficit "finances itself". Nothing could be more ludicrous that to make this claim. They save, we borrow and spend -- we are indebted. There is no free lunch. Because our debt is to people who can easily decide to switch out of dollars, our entire finacial system is put at risk if the current account deficit becomes too large or persists for too long. As the dollar weakens, the decline becomes self-reinforcing -- who wants to lend money to people with low interest rates and a weak currency? |
