Trade deficit is 2nd highest ever

Yahoo! News ^ | September 18, 2006 | MARTIN CRUTSINGER

[Toddsterpatriot]

WASHINGTON - America's deficit in the broadest measure of foreign trade increased in the spring to the second highest level in history, reflecting a big jump in payments for foreign oil.

The Commerce Department reported Monday that the deficit in the current account rose to $218.4 billion in the April-June quarter, an increase of 2.4 percent over the deficit in the first three months of the year.

The current account is the broadest measure of foreign trade because it covers not only trade in goods and services but also investment flows between countries. The deficit represents the amount the United States must borrow from foreigners to cover the shortfall between exports and imports.

Democrats, hoping to take control of the House and Senate in the upcoming congressional elections, contend that the soaring deficit figures are evidence of the failure of the administration's free-trade policies. The Democrats contend those policies have left U.S. workers vulnerable to unfair trade practices from other countries and contributed to the loss of nearly 3 million manufacturing jobs since President Bush took office.

The deficits through the first six months of this year put the country on track for a fifth consecutive annual deficit, surpassing last year's mark of $791.5 billion. The record high for a single quarter was a $223.1 billion imbalance in the October-December period last year.

So far, foreigners have been happy to hold dollars in payment for American purchases of cars, televisions and foreign oil. But the concern is what would happen should foreigners at some point decide they want to hold less in dollar-denominated assets.

A rush for the exits by foreigners could send U.S. stock prices and the value of the dollar plunging and send American interest rates sharply higher.

For the second quarter, the current deficit as a percentage of the overall economy stood at 6.6 percent, the same level as the first quarter.

For the second quarter, the deficit on goods rose to $210.6 billion, an increase of $2.6 billion from the first quarter, reflecting in part the surge in oil prices. America's surplus on services narrowed slightly to $16.8 billion.

The United States recorded a record deficit on investment flows of $4.2 billion. That meant that foreigners earned more on their U.S. investments than Americans earned on their overseas investments.

This deficit is expected to grow in coming quarters, reflecting the larger and larger amount of U.S. assets that are being transferred into foreign hands because of the huge trade deficits.

The deficit on unilateral transfers, the category that includes foreign aid, increased to $20.4 billion in the second quarter.

[Toddsterpatriot]

The deficit represents the amount the United States must borrow from foreigners to cover the shortfall between exports and imports.

I think Marty has this exactly backwards. We don't have to do anything to cover this "shortfall". We gave the foreigners cash, there is no "shortfall".

The correct way to look at this is that the foreigners have extra cash that they need to invest. They could put it under their mattress, but that doesn't pay much interest.

[Toddsterpatriot]

Martin Crutsinger gets it backwards Ping!

[Chi-townChief]

Yeah - he's got it confused with the budget deficit and the comment wouldn't be right for that one either.

[martin_fierro]

I used to worry about stuff like this.

Now I hire a little Mexican guy to do it for me.

[Toddsterpatriot]

LOL!

[Moonman62]

But Martin offers a solution. We must elect Democrats.

[BeHoldAPaleHorse]

We're DOOMED!

[Mase]

I think Marty has this exactly backwards.

He thinks like many of our FR protectionists, that a current account deficit somehow creates debt. He also doesn't understand that the rates of return on our liabilities is much smaller than the return on our assets.

Foreigners willingly accept a lower rate of return by buying our Treasury bills because they desire currency stability, liquidity, and a safe haven against political and economic risk.

On the other side, our investments overseas earn a much higher rate of return. When these higher rates of return are included in the calculation, as shown by the chart above, it becomes clear that the U.S. is a net creditor nation. Many of the protectionists here would be surprised to learn that when the return on our assets abroad is considered, China is a net debtor to the U.S.

[BeHoldAPaleHorse]

Many of the protectionists here would be surprised to learn that when the return on our assets abroad is considered, China is a net debtor to the U.S.

Whereupon, they'll screech "but when China nationalizes U.S. investments, we'll all be DOOMED!"

Among other things, that should tell you their economic agenda if they ever take power. See also: projection.

[Toddsterpatriot]

Whereupon, they'll screech "but when China nationalizes U.S. investments, we'll all be DOOMED!"

Or worse, China will call in their T-Bill holdings!!

[Mase]

Or worse, China will call in their T-Bill holdings!!

Or worse still, that China is going to march their army right up the Trans-Texas Corridor from Mexico and have their way with us. Oh the horrors free trade has wrought!

[B4Ranch]

"China is a net debtor to the U.S."


Would you kindly explain this in much more detail?

[Mase]

According to study by Ricardo Hausmann and Federico Sturzenegger, of Harvard's Kennedy School, the current-account deficit is a statistical illusion. They found that the net return on the U.S. financial position in 2004 was a positive $30 billion and not much different than it had been in 1982, despite 22 years of current-account deficits.

When factors such as insurance, know-how, and the value of universally recognized brand names like McDonald's, Disney and Coca Cola are counted, the U.S. becomes a net creditor, not a net debtor, nation. We earn more from our investments in China than they earn here, which when included, makes them a net debtor to the U.S.

[B4Ranch]

That's a study I would like to read!

[Mase]

Here's a short summary of their study:

Dark Matter’ Makes the U.S. Deficit Disappear

In a nutshell our story is simple. Once assets are valued according to the income they generate, there has not been a big US external imbalance and there are no serious global imbalances.

The entire study can be found here (pdf)

[B4Ranch]

Thank you very much for the research tails.