Wednesday 12 January 2005

Pic of the day: The obvious solution. Sadly it doesn't work much longer. (Screenshot from the anime Narue no Sekai, now available in the USA as "The World of Narue". I suppose if Europeans bought the American version it would slightly improve the US trade balance...)

Deficit

Even the newspapers are writing about the record-breaking deficit in the US trade balance, 60 billion dollar in one month, or around $2000,000,000 a day that the nation needs to buy on credit from the world. And that's a net amount. It's not like they are borrowing 2 billions and lending 2 billions. It's not like they are buying 2 billions and selling 2 billions, or even 1.5, or even 1, or even 0.5. No, this is the stuff they receive in foreign aid, unless by some act of divine intervention they somehow become able to pay it back in the future by buying much less than they sell.

There is not much I could add to this, except "I told you so! Nyah nyah!" which is not what a civilized, educated economist is supposed to say.

***

Given my earlier predictions, you should have expected to see a weaker dollar. This would lead to somewhat higher prices on imported goods, and on goods that contain imported parts or imported raw materials. So far, the dollar has held up surprisingly well. Indeed, it was gaining strength for a while just before these trade figures came to light. After that, there was a brief but sharp plunge. Why has the dollar kept up so well?

In no small part this is because the Federal Reserve, the US central bank, has an authority almost unique in the world, comparable only to such entities as the Vatican. Unlike organizations headed by politicians, it has proved itself willing to do what it considers necessary, again and again, and has also – not least under its current leadership – shown an almost uncanny insight into the underlying economic reality. When the Fed now is committed to raising interest rates, the world has no doubt that yes it will do that, and will continue to do that for quite a while.

The President, the House and the Senate are all kinda unhappy about the big deficit, but they are unable or unwilling to do anything about it. This is understandable, because it would mean either increased taxes (which stands right next to public devil-worship in the sight of the current Republican administration) or totally ruin the public services such as public schools, public hospitals, police and the army ... no, forget the army, any downsizing there would also be akin to devil- worship. Unless they basically close the schools and hospitals and stop paying social security, closing the deficit is beyond their means. And even if they did, there is still the large private consumption.

The large private consumption is the tree and the Fed has the axe at the root already. People are used to borrowing and spending, borrowing and spending. How long can they continue to do that when interest rates climb, steadily as an incoming tide? Unsecured shopping credit will be so expensive that at some point you will no longer be able to even pay the interests on your loans, and then you will quickly reach your credit limit. As for property and housing, at first new buyers will not afford borrowing the required amounts to buy a new home. With no buyers, the estimated sales price will start to fall. When you can not sell your home without taking a loss, mobility will be hampered. You cannot move to get a better job, and if you lose your job you have a hard time getting a new because you cannot move to where the new jobs are.

***

It may be that some Americans, especially those far to the right, believe they have some inherent right to receive goods without paying for them, by the simple virtue of being American. I expect that this illusion will be dashed soon. Something must be done to finance the trade, and right now it seems the most accepted way is to raise interest rates. This may be OK for those who have more money than they need, but it will not be pleasant for those who need to borrow.

I wonder how long popular support for the right-wing politicians will last once people find themselves living in relative poverty while the ruling class and their allies grow rapidly richer. Historically, this situation has preceded some very sudden and unpleasant changes in societies elsewhere. But of course, in those societies the ruling class kept hanging on to power by any means rather than surrendering it in fair elections. Surely we won't see such a thing happen in an advanced democracy such as the USA...