Buffett, Economists Say Current Account Deficit Threatens U.S.
>>``We are in a country that is buying more from the rest of the world than we're selling, and we're doing it on a big scale,'' Buffett told U.S. chief executive officers at a Microsoft Corp. gathering in May 21 in Redmond, Washington.
``Any other country in the world that did that on that scale would have seen greater currency depreciation already,'' he said. ``We have such a strong currency historically that there's been a delayed effect. But it's started to happen in the last year, and unless the underlying conditions change it's going to continue.''<<
June 2 (Bloomberg) -- Economists such as Morgan Stanley & Co.'s Stephen Roach long have predicted that the rising U.S. current account deficit, the broadest measure of trade and net investment flows, would sour investors on U.S. assets.
The widening gap would send the dollar into a tailspin and force the Federal Reserve to raise interest rates to keep capital coming into the U.S., Roach and others have said.
It hasn't happened. The 10-year Treasury note yield has fallen to a 45-year low of 3.29 percent. The Standard & Poor's 500 stock index has risen 9.5 percent this year -- after the deficit grew to $503 billion in 2002, 5 percent of U.S. output.
Yet with U.S. interest rates lower than those in Europe, and the dollar's 20 percent drop against the euro in the last year reducing the value of U.S. assets, investment from outside the U.S. has fallen. Berkshire Hathaway Inc. Chairman Warren Buffett and International Monetary Fund Chief Economist Kenneth Rogoff, also have warned that the record deficit is unsustainable.
``We are in a country that is buying more from the rest of the world than we're selling, and we're doing it on a big scale,'' Buffett told U.S. chief executive officers at a Microsoft Corp. gathering in May 21 in Redmond, Washington.
``Any other country in the world that did that on that scale would have seen greater currency depreciation already,'' he said. ``We have such a strong currency historically that there's been a delayed effect. But it's started to happen in the last year, and unless the underlying conditions change it's going to continue.''
$1.5 Billion a Day
The current account is a tabulation of the U.S. foreign trade balance, that is, exports of goods and services minus imports, plus net investment flows.
Investment from abroad is key to financing that gap because the deficit can only be reduced by income from trade or capital flows. The U.S. needs to attract about $1.5 billion a day from abroad to finance the deficit, said Don Alexander, a currency strategist at Citigroup Private Bank in New York, with $166 billion in assets.
Two-thirds of the increase in the current account gap last year stemmed from a rise in the U.S. trade deficit, which widened after exports sagged because of the weak world economy. At the same time, net investment income fell as receipts from abroad fell more rapidly than payments on foreign investments in the U.S.
Trade Deficit
Private net purchases of U.S. government securities fell by $62 billion to $338 billion in 2002, according to Commerce Department figures. Net purchases of U.S. corporate and other bonds fell by $41 billion to $161 billion, while net purchases of stocks fell by $63 billion to $56 billion.
As private international investors bolted, the decline in capital flows from abroad was made up by increased financing by central banks, which bought dollars in an effort to keep their own currencies weak and their exports competitive, said Edward Hyman, president of International Strategy & Investment, a consulting firm in New York.
Other governments poured $93 billion into U.S. assets in 2002. Central banks' purchases stopped when the war in Iraq began, Hyman said.
The lower interest rates in the U.S. than Europe have made investments in American assets less attractive than they were a few years ago, said Bryan Smith, head of currency trading at Barclays Global Investors, which manages currencies for $17 billion of assets.
Low Yields
Two-year U.S. Treasury notes are now offering yields of 1.34 percent, compared with 2.08 percent for the counterpart rate in Germany, Smith said. The comparable yields on 10-year Treasury notes are 3.32 percent in the U.S. and 3.63 percent in Europe.
``Our demand for foreign capital is increasing dramatically at a time when we can't provide the returns needed to attract more of it,'' Morgan Stanley's Roach said in an interview.
Some economists say the risk of international investors fleeing the U.S. is remote because there are few alternatives.
``Are investors going to move huge amounts of capital out of the U.S. and put it in Japan or Europe? They would be mad to do that,'' said Lyle Gramley, a former Fed governor who now serves as a senior adviser at Schwab Capital Markets in Washington.
Europe is on the verge of recession after the German and Italian economies contracted in the first quarter, and Japan's growth stalled last quarter as the recovery from its third recession in a decade is ending.
Greenspan
Fed Chairman Alan Greenspan told Congress last month that while the widening deficit may create ``an unstable equilibrium'' for the U.S., it would only be ``over the very long run.''
Robert Solow, a Nobel Prize-winning economist at the Massachusetts Institute of Technology, said if the U.S. is unable to attract financing from overseas, ``the Fed would be forced to do things it would rather not do,'' raise interest rates to keep the U.S. currency from plunging.
Yet the Fed has cut its benchmark overnight interest rate 12 times since January 2001 to boost economic growth, which is expected to total 2.4 percent this year, according to a Bloomberg News survey of 59 economists. Investors are predicting the central bank will not raise rates anytime soon.
While the dollar has declined against the euro and yen over the past 12 months, it's still the world's primary reserve currency. The dollar Friday rose the most in eight weeks against the euro in New York trading after President George W. Bush said he backed a ``strong dollar.'' Bush's comments prompted some traders to speculate the U.S. is trying to halt a slump in the dollar that sent it to an all-time low Tuesday.
Delayed Effect
The declining dollar eventually should reduce the U.S. trade deficit by making American goods cheaper abroad and foreign goods more expensive for Americans, says Jerry Jasinowski, president of the National Association of Manufacturers.
Jasinowski's group has said it wants the U.S. currency to decline in value to boost growth in the U.S. A lower dollar would also reduce the risk that the world's largest economy will encounter deflation, or a general decline in prices and wages, because import prices would rise.
That effect can take as long as a year to boost exports, said Scott Anderson, an economist for Wells Fargo & Co. in Minneapolis.
``The initial effect of a depreciation of the dollar is generally to raise the U.S. current account deficit temporarily,'' Steven B. Kamin, deputy associate director of the Fed's division of international finance, said in an article in the May 2003 issue of the Federal Reserve Bulletin. That's because ``it raises import prices -- and hence the value of imports -- more rapidly than it stimulates sales of exports.''
quote.bloomberg.com |
