Monday, March 19, 2007

The trade deficit that wasn't there...

Nobody (including me) is worried about the US trade deficit. One reason is those of us who did worry about it for years have become bored and now worry about other stuff - like global worming. Maybe we don't have to start now, either.

The current account deficit - of which the trade balance is the most important part is bad but improving. One reason is people in poor countries send their money here to invest.

Because emerging economies' supply of financial instruments is so unreliable, people may hoard more of them as a precautionary measure. Firms and households fear they will not be able to borrow to tide themselves over bad times, therefore they choose to save for a rainy day instead. Because they cannot transfer purchasing power from the future to the present, they must store it from the past.

If global imbalances are the result of such frictions, they are unlikely to unwind quickly. Financial systems, after all, do not mature overnight. If Mr Caballero is right, America is also less vulnerable to a sudden run on its securities. Where, he asks, would the excess demand for global assets go? [More]

In short, poor countries don't have a whole range of mutual funds and money market accounts and we do. And outside some bad apples like Enron, you can get your money back someday pretty reliably.

Another reason our trade balance is improving is our dollar is getting cheaper versus other currencies. This is great for ag because it keeps exports humming and mitigates oil prices (imagine if oil was priced in euros!)

After a while, foreign investors may get fed up with getting back less than they invested because of currency fluctuations, but we've been saying that for decades, it seems.

The important thing is to make sure other countries don't get their acts together and establish strong property rights laws and credible investment markets to compete with ours.

What can go wrong?

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