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Greenspan: U.S. Trade Gap Could Hurt Economy  
User currently offlineMdsh00 From United States of America, joined May 2004, 4124 posts, RR: 8
Posted (9 years 8 months 1 week 6 days 13 hours ago) and read 1014 times:

http://www.msnbc.msn.com/id/6529487/

So now that we are poised to increase our trade deficit once again and congress approving the limit up to $8 TRILLION, the continued fall of the dollar against the Euro, how does everyone feel? As a young person, I'm f**king pissed that this is all being left for me and my peers to pay off. But that's okay since we can't let those gays get married!  Yeah sure

[Edited 2004-11-19 18:38:48]


"Look Lois, the two symbols of the Republican Party: an elephant, and a big fat white guy who is threatened by change."
34 replies: All unread, showing first 25:
 
User currently offlineLY7E7 From Israel, joined Jun 2004, 2235 posts, RR: 19
Reply 1, posted (9 years 8 months 1 week 6 days 13 hours ago) and read 1008 times:

Doesn't the trade gap supposed to shrink with the Euro climbing high?


2 things are endless: ignorance and space
User currently offlineGigneil From United States of America, joined Nov 2002, 16347 posts, RR: 85
Reply 2, posted (9 years 8 months 1 week 6 days 12 hours ago) and read 1002 times:

The higher the Euro goes, the bigger the trade gap.

N


User currently offlineCfalk From , joined Dec 1969, posts, RR:
Reply 3, posted (9 years 8 months 1 week 6 days 12 hours ago) and read 990 times:

So now that we are poised to increase our trade deficit once again and congress approving the limit up to $8 TRILLION

Don't confuse the trade deficit with the budget deficit. The trade deficit is caused by Americans who like to buy foreign made goods like BMWs, Sony, and toys made in China, not to mention oil for those SUVs. That is what is mostly responsible for the pressure on the dollar, not the budget deficit.

Charles


User currently offlineAirplay From , joined Dec 1969, posts, RR:
Reply 4, posted (9 years 8 months 1 week 6 days 11 hours ago) and read 985 times:

President Bush says the best ways to handle the yawning trade deficits is to get other countries to remove trading barriers and open their markets to U.S. companies.

HAHAHAHA….that’s a good one! Canada, the US’s most significant trade partner by volume is under constant threat from trade barriers imposed by the US even though we have a free trade agreement.

The US consistently tries to bypass provisions of the NAFTA in their favour. By the time the WTO exposes the illegal trade barriers, the damage is done to Canadian companies.

This unfair and illegal practice results in Canadian companies being forced to find alternate sources and markets for goods. Why rely on our lying cheating friends across the border when we have other stable significant potential markets to tap like Europe and Asia?

Like the article alludes to, the saving grace in the past is the huge foreign investment in the US dollar by countries who have adopted the US dollar as the standard for trade. The strong Euro along with the increase of Euro based trade is sounding the alarm for the US dollar. It is also significant that Cuba has outlawed the US dollar. How many other countries in the world will liquidate their US dollar investments in favour of the Euro or local currency?

If the US was serious about revitalizing their economy, they would lose their arrogant stature, swallow a little pride, admit their mistakes, start to rebuild diplomatic ties, and start to HONOUR THEIR INTERNATIONAL AGREEMENTS.


User currently onlineMaverickM11 From United States of America, joined Apr 2000, 17352 posts, RR: 46
Reply 5, posted (9 years 8 months 1 week 6 days 11 hours ago) and read 972 times:

"The higher the Euro goes, the bigger the trade gap
"

Theoretically, the cheaper the dollar becomes, the more attractive US exports will be over EU exports. Some believe that will help compensate for the trade gap, but I think just about everyone agrees that it won't make much more than a dent.



E pur si muove -Galileo
User currently offlineFalcon84 From , joined Dec 1969, posts, RR:
Reply 6, posted (9 years 8 months 1 week 6 days 11 hours ago) and read 966 times:

Not one of the most penetrating observations Greenspan has ever made. That's been known for a long time.

But it seems the "tax cut and spend" GOP majority doesn't feel the same way, nor with the deficit. They go on as if nothing is wrong....


User currently offlineMD-90 From United States of America, joined Jan 2000, 8502 posts, RR: 12
Reply 7, posted (9 years 8 months 1 week 6 days 10 hours ago) and read 953 times:

It's only going to hurt when the Central Banks of China and Japan decide to stop funding our overspending by by T-bills.

User currently offlineFalcon84 From , joined Dec 1969, posts, RR:
Reply 8, posted (9 years 8 months 1 week 6 days 10 hours ago) and read 949 times:

So, in other words, MD-90, our economic health is at the mercy of Japan, China and other nations? And you don't have a problem with that, eh?

User currently offlineKlaus From Germany, joined Jul 2001, 21410 posts, RR: 54
Reply 9, posted (9 years 8 months 1 week 5 days 11 hours ago) and read 927 times:

Greenspan basically gave the green light for a further decline of the Dollar with is passionless pro-forma statements. He all but explicitly declared an official weak Dollar policy.

The question is on what grounds other countries should still keep their devaluating Dollar reserves... It´s getting more and more expensive...


User currently offlineCfalk From , joined Dec 1969, posts, RR:
Reply 10, posted (9 years 8 months 1 week 5 days 10 hours ago) and read 923 times:

So, in other words, MD-90, our economic health is at the mercy of Japan, China and other nations? And you don't have a problem with that, eh?

It goes both ways. Japan, China, and much of the rest of the world have become structurally dependant on having large trade surpluses with the U.S. If the U.S. were to stop buying from them (or simply only buy as much as they sell back - i.e. trade deficit = zero), then many economies would collapse. The U.S. is basically providing nearly $500 Billion of foreign aid each year through the trade deficit.

Therefore, those countries will do everything they can to prevent the dollar from sliding further, which would reduce the value of their exports - or to be more precise, the value of the dollars they get for those exports. If they stop buying or sell off U.S. treasury bills, their economies will collapse like the French Army.

It's a catch 22 situation, and the funny thing is that the U.S. has the least to lose compared to other nations.

Charles


User currently offlineFDXmech From United States of America, joined Mar 2000, 3251 posts, RR: 34
Reply 11, posted (9 years 8 months 1 week 5 days 10 hours ago) and read 918 times:

>>>Theoretically, the cheaper the dollar becomes, the more attractive US exports will be over EU exports.<<<

That used to be conventional wisdom with a large manufacturing base. But my gut feeling is our manufacturing base has shrunk so much that what will we export?



You're only as good as your last departure.
User currently offlineAirplay From , joined Dec 1969, posts, RR:
Reply 12, posted (9 years 8 months 1 week 5 days 3 hours ago) and read 901 times:

The U.S. is basically providing nearly $500 Billion of foreign aid each year through the trade deficit.

Cfalk, this seesm to be a recurring theme of yours. It appears that in your opinion, the US supplies foreign aid to the world just by existing.

The truth is that the US has a long history of exploiting other countries for their own gain. I don't know of any trade deal the US has made purely for the benefit of other countries. Far from it. They typically tilt the financial gain in their favour.

It appears however that the trend is reversing. I'm not surprised. You can only screw people over for so long.


User currently offlineArrow From Canada, joined Jun 2002, 2676 posts, RR: 2
Reply 13, posted (9 years 8 months 1 week 5 days 1 hour ago) and read 884 times:
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The U.S. is basically providing nearly $500 Billion of foreign aid each year through the trade deficit.

That's bizarre reasoning. Has it occurred to you that the ability of your trading partners to buy the stuff you want to sell is tied to the economic benefits they derive from the stuff they sell you? Stop buying from them, and the whole merry go-round stops. Erect those tariff walls, and the dirty thirties are just around the corner.

The U.S. trade deficit is a huge, overblown bogeyman. The budget deficit and growing debt, on the other hand, will sink the economy faster than the Titanic. That's the main reason for the fall of the dollar, and it will continue to do real damage. If that dollar gets much lower, Asian debt/bond holders will bail out and America's descent to a second-rate economic power will be about a decade away.



Never let the facts get in the way of a good story.
User currently offlineBarfBag From India, joined Mar 2001, 2207 posts, RR: 6
Reply 14, posted (9 years 8 months 1 week 5 days ago) and read 877 times:

But no matter how you want to spin it, the U.S. buys nearly $500 billion worth of goods without a corresponding export. That means a NET $500 billion leaves the U.S. each year to go into the pockets of other countries, including China, Japan, Germany, and many others.

It doesn't simply go 'into their pocket'. China for one, has no full convertibility. They (for most part, Japan and China's central banks) cannot just look at their monetary policy and let exchange rate policy be guided by market forces. Both of them hold down their currencies relative to the dollar in order to maintain their export competitiveness.

If they were to let the exchange rate be guided by market forces, their currencies would rise significantly with respect to the dollar. In order to prevent this the CBOC/JCB buys dollars off the market and releases renminbi/yen, and then try to curb inflation from the increased domestic money supply by selling government/treasury bonds. The Indian central bank, the Reserve Bank of India, does the same thing with its $125 billion foreign exchange pile.

On the other hand, the dollars that the respective central banks accumulate themselves need to be invested someplace. In both their cases, they are *significantly* invested in US t-bills. You want numbers ? Here you go, latest as of Sept 2004 and continuously updated:
http://www.ustreas.gov/tic/mfh.txt
Japan: 720.4 billlion
China: 174.4 billion

Two countries together finance $900 billion of US debt. Why do thy do it ? Because its an easily avenue to put the export earnings they suck out of their own market, which would otherwise cause their own currencies to rise - a strictly verboten idea for them. They can also invest the dollars by other means, like real estate investments - the Japanese and Saudis have a lot of that. It is wrong to see it as money leaving the U.S.; a *lot* of it comes back, and as long as it comes back, Greenspan can continue to to keep down interest rates unless domestic inflation warrants otherwise. Then it goes out again as export earnings, and the cycle continues.

Mature economies in general let the exchange rate take care of iteself and just concentrate on the domestic monetary policy. Developing countries that follow the export-led growth model (most prominently China) must attempt to balance both, which brings in imbalances that must be matched elsewhere, in this case, by the US' trade deficit.

I still agree that the US is still in a better position, for several reasons, most importantly the sheer weight of its economic muscle, its more rational and market driven economic system that can handle shocks better, and the ironic psychological position that being so greatly in the deficit itself puts the US in a strong bargaining position.

None of this removes the fact that the current economic bearhug & dance between US and Japan/China is inherently imbalanced and dangerous, with potentially catastrophic consequences for both sides, and particularly China, since they are just growing and running their entire manufacturing engine on wafer thin margins by compensating using volume, while papering over ridiculously screwy fiat-driven economic policies by riding on top of their economic exuberance, and a misstep and Japan-like extended economic burp will cause all 1.5 billion of them to go bonkers. Having them next door makes me all the more uncomfortable about the possibility.



India, cricket junior and senior world champions
User currently offlineCfalk From , joined Dec 1969, posts, RR:
Reply 15, posted (9 years 8 months 1 week 5 days ago) and read 873 times:

Has it occurred to you that the ability of your trading partners to buy the stuff you want to sell is tied to the economic benefits they derive from the stuff they sell you?

Let's say you are in a closed universe where you are a farmer which produces beef and chicken. Your neighbor is a farmer that produces grains and vegetables. You sell meat to him and he sells produce to you, and you both live quite happily on this equal trade.

Then your neighbor turns vegetarian and stops buying from you, but you still need his goods. Since he no longer will accept meat in trade, you have to give him cash from your savings. He grows richer and you grow poorer. You also reduce your production capacity and have to lay off some farm hands because you no longer sell as much as you used to. Once your cash is spent, you have to buy your produce with IOUs (T-Bills). You also pay your employees with IOUs (budget deficit).

Meanwhile, your neighbor has been doing quite nicely. Since he is no longer buying from you, he can keep that extra value for himself. But he is still getting money from you. He builds a bigger house and hires servants, and driver and a butler. Field hands do the work and he sits on the porch drinking Mai-Tais. Life is good. Then you run out of cash and he accepts your IOUs. That's OK for a while. But soon, he has a closet full of IOUs. Their perceived value to him drops. He grows reluctant to accept more, but if he does not accept them, he can no longer sell to you, and he will have to lay off his servants and start doing the work himself again. That would suck, especially when his employees live nearby and would lynch him if he fired them. He continues to accept the increasingly worthless IOUs, digging himself deeper and deeper into the hole.

You see where this ends up, right? Eventually, the beef farmer goes bankrupt, unable to pay his IOUs. The produce farmer, who made his fortune off the beef farmer and lived "high on the hog", is besieged by angry, out-of-work laborers and no longer has any income from his cash cow (the beef farmer). His closetful of IOUs are worthless, as you have a ton of them and so does a lot of other people the beef farmer owed money to. Everyone ends up either broke, unemployed, or lynched.

Now the big question is: How could the problem have been avoided in the first place? As long as there was close to equal trade between the two, things went fine. If, in response to the produce farmer's going vegetarian, the beef farmer stopped selling to him as well, both sides end up poorer. The solution is that both farmers must accept that they need each other and continue to buy from each other in more-or-less equal, and hopefully increasing value.

Countries like China and Japan must adapt their economies so that they are not so dependent on trade surpluses. I don't see either happening any time soon - China is too greedy for growth, and the Japanese economy is just barely struggling along on an even keel as it is.

Prognosis: A world of hurt on all sides.

Prescription: Free trade in both directions, and a little wisdom on the part of citizens to think before they buy an imported product. Do they really need it? Is there nothing made locally that will do the job, even if it might cost a little bit more?

Charles

[Edited 2004-11-21 08:06:24]

User currently offlineCfalk From , joined Dec 1969, posts, RR:
Reply 16, posted (9 years 8 months 1 week 4 days 23 hours ago) and read 869 times:

BarfBag,

Good post, and I agree with what you say. Forgive the simplistic terminology, but I'm trying to keep things simple to understand. Clearly, to someone with a bit more economic eductation, such explainations will seem overly simplistic. What you say about the debt reinvestment is correct - it's a debt cycle of IOUs which extends my Farmer scenario above. It serves to delay the inevitable, but is in the long term unsustainable.

You raise one interesting point - fixed exchange rates. Such policies are in the long term unsustainable. A nation can peg its currecy for a long time, but if it gets too far awy from economic reality (supply and demand setting market rates), all they are doing is bottling up excess pressure. Eventually, sometimes after many years - see the USSR - dawn awakens and the bottle bursts. Letting the currency float freely is like having a safety valve, which constantly ensures that the currency is where it should be - more or less, depending on the mood and caffeine (and cocaine) intake of Forex traders that week. The dollar today is low because it should be low. Any attempt to bring it back up without adressing the underlying fundementals (trade and budget deficits), is bound to fail, and will hurt a lot of innocent people in the process.

Charles


User currently offlineL-188 From United States of America, joined Jul 1999, 29791 posts, RR: 58
Reply 17, posted (9 years 8 months 1 week 4 days 23 hours ago) and read 867 times:

So I take it you wheren't a fan of the gold Standard Cfalk?

Still everybody else here would do well to listen to his analysis.



OBAMA-WORST PRESIDENT EVER....Even SKOORB would be better.
User currently offlineCfalk From , joined Dec 1969, posts, RR:
Reply 18, posted (9 years 8 months 1 week 4 days 23 hours ago) and read 865 times:

So I take it you wheren't a fan of the gold Standard Cfalk?

No, mainly for logistical and integrety reasons. The gold standard would only work properly if there is a firm, unbreakable commitment to emit only the amount of money that can be backed in reserves, and with so much money now floating in the ether around the world, it would simply be impossible to control or police. At least the free-floating system is honest - the value of a currency is whatever someone is willing to pay for it. Period.

Charles


User currently offlineBarfBag From India, joined Mar 2001, 2207 posts, RR: 6
Reply 19, posted (9 years 8 months 1 week 4 days 22 hours ago) and read 858 times:

Another thing that hurts Japan/China is that maintaining such large dollar reserves is *costly*. Their domestic interest rates are higher than in the US. By buying dollars off the market to keep their currency down, and then using said dollars to buy US debt, they earn the low interest rate on US t-bills, while they must at the same time pay out a higher rate on the domestic bonds they issued in order to pull out of their local markets the money they paid for those dollars in the first place, since the excess money causes inflation.

They might therefore well be losing money to maintain those reserves, just because they must do so in order to keep down their currencies. When the dollar in turn depreciates, all their reserves (the IOUs in CFalk's example) loses value, but they must still keep down their currency. China essentially does so by fiat, which makes it all the more harder for them in the long run. The Japanese just keep buying dollars like there's no tomorrow, as their colossal dollar reserves show.

What will hurt the US on the other hand, is loss of confidence in the US debt and the dollar. Just this September a single biweekly T-bill sale saw muted interest, which in turn sent alarm bells ringing all through the US financial establishment. If OPEC mandated tomorrow that its oil sales should be paid for in Euros, it would be catastrophic for the US. Of course, also means the OPECs vast dollar hoard too goes down the drain.

The gold standard put a redemption value on the IOUs. If things were still tied to that standard, Ft Knox would probably take up all of the town by now, and it would have very well absorbed all of the world's gold. Instead the US dropped it in favour of its own word and its economic strength.



India, cricket junior and senior world champions
User currently offlineMD-90 From United States of America, joined Jan 2000, 8502 posts, RR: 12
Reply 20, posted (9 years 8 months 1 week 4 days 22 hours ago) and read 849 times:

the U.S. has the least to lose compared to other nations.

I dunno. I wouldn't want to see it happening, that's for sure.


The U.S. trade deficit is a huge, overblown bogeyman. The budget deficit and growing debt, on the other hand, will sink the economy faster than the Titanic. That's the main reason for the fall of the dollar, and it will continue to do real damage.

I agree.


User currently offlineAirplay From , joined Dec 1969, posts, RR:
Reply 21, posted (9 years 8 months 1 week 4 days 17 hours ago) and read 833 times:

Spoken like a true Marxist who doesn't have a clue of how the markets really work. And I don't have the time to give you the whole Trade Mechanics course.

Marxist? How were you able to take the Trade Mechanic's course while your head was so far up your ass?

Your rhetoric about world trade consists of the US's ideal theoretical model of world trade. Well....surprise. The world doesn't fall neatly into the US's requirements. And yes...although I am not one as you imply, there are even some marxists out there that the US trades with.

The trade deficit that the US has been ignoring in the past has been supported by a huge imbalance of currency investment. With the pace that the Euro is gaining popularity, the US has alot of catching up to do to prevent economic collapse.

So...start treating the rest of the world nicely, and maybe we'll consider evening up that trade ratio.....

Oh yah....and maybe stop going around calling people Marxists in derogatory terms. It takes all kinds to develop a market and if you were selling me something right now, I'd tell you to go pound sand....



[Edited 2004-11-21 14:47:33]

User currently offlineYyz717 From Canada, joined Sep 2001, 16245 posts, RR: 56
Reply 22, posted (9 years 8 months 1 week 4 days 14 hours ago) and read 817 times:

With the pace that the Euro is gaining popularity, the US has alot of catching up to do to prevent economic collapse.


No trade deficit has ever caused an economic collapse. The US economy remains strong.

Wuold you like an economic collapse in the US Airplay?



Panam, TWA, Ansett, Eastern.......AC next? Might be good for Canada.
User currently offlineMD-90 From United States of America, joined Jan 2000, 8502 posts, RR: 12
Reply 23, posted (9 years 8 months 1 week 4 days 10 hours ago) and read 802 times:

If OPEC mandated tomorrow that its oil sales should be paid for in Euros, it would be catastrophic for the US.

That's also true.



As Congressman Ron Paul relates, the federal debt has been growing by an average of $1.6 BILLION per day since September 30, 2003.

http://www.lewrockwell.com/paul/paul217.html


User currently offlineArrow From Canada, joined Jun 2002, 2676 posts, RR: 2
Reply 24, posted (9 years 8 months 1 week 4 days 6 hours ago) and read 776 times:
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"Countries like China and Japan must adapt their economies so that they are not so dependent on trade surpluses. I don't see either happening any time soon - China is too greedy for growth, and the Japanese economy is just barely struggling along on an even keel as it is.

Prognosis: A world of hurt on all sides.

Prescription: Free trade in both directions, and a little wisdom on the part of citizens to think before they buy an imported product. Do they really need it? Is there nothing made locally that will do the job, even if it might cost a little bit more?"


Not a bad parable, Charles -- but far too simplistic to explain trade balances between China and the U.S. You have to factor in the somewhat gross differences in material standards between the two countries, relative standards of living, average earnings in the manufacturing sector, and a whole range of other things that compare with each other like night and day.

China is now doing what the US did in the 19th and 20th centuries -- growing the economy by ratcheting up exports to the maximum extent possible and relying on that big US market to suck it all up (with the US it was Britain and Europe). India is embarking on the same path -- give it another 10-20 years and they'll both eclipse the American economy by a large margin.

You're right about free trade being the answer -- but I don't see much adherence to that concept in the US right now, nor in Europe. What I see are bunch of fat cat American/European farmers, in cahoots with a terribly bloated and inefficient manufacturing sector, doing everything they can to make sure that cheap foreign imports don't get more than a foothold in their market. The goal is to keep those upstarts in other countries from getting too uppity. Watch Lou Dobbs for a few nights.

My worry is a return to the Smoot-Hawley approach in the 1930s -- which is now broadly accpted as one of the principle reasons that depression became so well entrenched and lasted so long.



Never let the facts get in the way of a good story.
25 Airplay : No trade deficit has ever caused an economic collapse. The statement you are replying to, YYZ717, says "With the pace that the Euro is gaining popular
26 Post contains images Yyz717 : Wuold you like an economic collapse in the US Airplay? Um...no. Would you? Strange question. You are predicting a US economic collapse with almost gle
27 Airplay : You are predicting a US economic collapse with almost glee in reply 21. Combined with your other anti-US tirades, it's a logical question. Glee? You c
28 Yyz717 : Define "in the toilet". US economic growth remains strong. Unemployment is low. Inflation is low. Sounds like a strong economy to me Again, you really
29 Arrow : "I subscribe to the Globe and Mail, National Post and the Economist. All report a strong US economy on average. Only you report a US economy that is "
30 Yyz717 : You're not reading them very thoroughly. The economy is strong right now, but how long will it last? You're contradicting yourself. All major newspape
31 Post contains links and images B2707SST : It's easy to paint the US' current account and budget deficits as ticking time bombs for the US. Certainly they are cause for concern, but as Cfalk, B
32 Post contains images Airplay : In light of these facts, I would like Airplay to elaborate on the following comment: In my opinion, the US economy is in the toilet OK..here it is. An
33 Yyz717 : A great many American people have lost jobs to outsourcing and there is promise for even more of them. Good for investors....bad for the working class
34 Airplay : Actually outsourcing has proven to be beneficial to the US economy as corporations have been able to reinvest their higher resulting profits in new US
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