Re: Japan and Current Account Deficit
Thread,
I thought this was a good article for this thread. It clearly explains the problem that result with the US having to be the world's biggest consumer.
With our trade deficit balloning month after month, it would seem like if one is looking for a bubble popper, maybe this is it? It's pretty hard to maintain such a huge trade imbalance while keeping interest rates low and the dollar strong. But as we all know, these are unusual times and it is being precariously done.
I don't particularly have any idea when the trade deficit will reach unsupportable levels, but it certainly would appear it has to happen sometime, right? Hopefully we are able to back away slowly.
MikeM(From Florida)
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ALAN GREENSPAN'S CONUNDRUM
A problem even the Fed chief can't solve
By Paul E. Erdman
SENATOR BUNNING: Do you think the present trade deficit is a cause of concern?
MR. GREENSPAN: There is a tricky problem here, which we have not been able to solve. We do know that the trade deficit creates a very large so-called current-account deficit, which is really the net borrowing from the rest of the world. And invariably, what we are seeing is a major increase in dollar asset holdings by non-Americans, which is clearly the other side of the trade deficit. As of now, the appetite to hold U.S. dollar-denominated assets seems quite extensive, and there is no evidence that I'm aware of which is suggestive of any individual's eschewing dollar asset holdings. But we nonetheless do have the problem of projecting how far into the future this particular type of current account deficit can continue without impacting on the exchange rate and, as a consequence, on the whole structure of the American economy.
SAN FRANCISCO (CBS.MW) -- How much of our national debt is in foreign hands? A lot. In the decade prior to 1994, it had remained at around 20 percent or less. Since then, foreign ownership as a percent of total privately held public debt has rocketed up to 38 percent. With our trade deficit projected to be in excess, maybe well in excess, of $200 billion in years ahead, that may rise to a level approaching 50 percent. Among the largest holders are Japan, mainland China and OPEC nations, which many would regard as hardly the safest of hands.
So how to solve Mr. Greenspan's problem? There are only two ways that I know of. If foreign investors begin to get skittish, the Fed could raise dollar interest rates to entice them to keep the money pouring in. The other way is to allow for a major devaluation of the dollar, in order to "correct" the trade imbalance. The trouble with this is that it takes a long time to really accomplish that end.
When the word gets out that this is the new direction the United States is taking, rather than suffer severe foreign exchange losses on the dollar holdings, many foreign investors, and especially the Japanese, might decide to pull out of U.S. Treasurys and back into the yen en masse.
One conclusion making the rounds is that the $200 billion-plus needed to finance our trade deficit, and an immense Japanese budgetary deficit that will approach 10 percent of their gross domestic product, will require an extraordinary tapping of global savings.
It has been suggested that this could drive the Japanese bond yields toward 3 percent, and our 30-year Treasury yield toward 6 percent. Such higher U.S. bond yields would provide the needed enticement for foreigners to stay put, preclude the need for the Fed to change short-term interest rates, and allow the United States to maintain its bias in favor of a strong dollar.
This world is getting complicated.
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