Amid the recent rout of the
USDollar, fears of an all-out trade war have been stoked globally. The G20
finance heads are currently struggling to find common ground on current
account imbalances that will avert the inevitable. The point should not be
lost on anyone that none of these leaders are really concerned about why
these imbalances exist, but rather are only focusing on avoiding the negative
consequences of poor fiscal behavior stacked up over the past several
decades. It is for these reasons that any accords that are reached now will
fail. The same forces that created the current dissatisfaction will create
future dissatisfaction. As in many other arenas today, we appear content to
kick the can down the road and try to keep the game going another month or
year. This week we’ll take a look at the current account and some of
the factors driving these imbalances.
Using 2009 data, the United
States ranked 181st out of 181 ranked nations in terms of current account at
-$380.1 Billion. Anyone out there want to take a guess at some of the lowest
You guessed it. Spain,
Italy, France, and Greece are right behind the US at the bottom of the heap.
If anyone still thinks that debt doesn’t matter, this fact should
provide a compelling argument to the contrary. The ongoing problems in Europe
as a result of debt and the increasing violence in the French strikes
portends a bad ending for those nations that insist on running massive debts
to the rest of the world. This is particularly true when that borrowed money
is used to prop up otherwise unsustainable social programs. People will not
be quick to vote to end their own gravy train, and as such, these things
usually end badly.
Taking a look at the
Eurozone both in totality and by its worst offenders, it becomes rather
obvious that Germany is carrying the entire EU. While this is no surprise or
great revelation, it should emphasize the inability of a few savers to make
up for the gross negligence of the rest. Frankly, it should be a bigger
surprise that Germany isn’t seeing the kind of civil unrest that France
is. If nothing else, this should underscore an interesting characteristic of
human nature. People who are having something (that for the most part
unearned, at least in this example) taken away react much more violently than
those who are being forced to pay for it.
Why Support the Dollar?
Also by contrast, the same
data that showed the US as being ranked 181/181 showed Germany as being
ranked #3 behind only China (1) and Japan (2). It should be a curiosity then
why Japan is stepping in to support the Dollar. This action started a few
weeks ago, with rhetoric, and has been followed up by somewhat meaningful
action. The obvious question is why would a nation who ranks #2 in a valid
measure of economic strength step in to support a dying currency paradigm?
Especially when doing so will only be to its own peril? It is pretty obvious
that just on a current account basis that the US is leading the way down
followed by the UK and most of Europe. There are other offenders as well.
The answer is found in the
most massive of imbalances, and the root of the current account and debt
problem, which is the imbalance of manufacturing. Japan does a great deal of
its business abroad and as such desires a ‘weaker’ currency to
make its exports more competitive. It must compete with China, and the other
Asian manufacturing hubs in foreign markets, and therefore it is to
Japan’s advantage to keep the Yen cheap just as it is to China to keep
the Yuan suppressed. This is a direct result of globalization, and it is this
author’s opinion that this reality was an intended consequence of the
actions of the 1980s and 1990s. Economists, political analysts, and
historians will undoubtedly argue about the causes of the eventual decline of
the US/UK/Eurozone. Was it the nearly exponential explosion of social
entitlement programs or was it the decay of manufacturing capability and
production that triggered the demise? The two happened nearly simultaneously
here in the US, so the debate is wide open or so it would seem.
What Came First?
I would opine that the
diminished manufacturing activity and increase of ‘great society’
style entitlement programs go hand in hand. The transition from production to
consumption creates a gap in the wealth function and that must be filled if
societal paradigms are to be maintained. Governments, in their infinite
wisdom, thought it wise to steal from tomorrow to create a paradoxical utopia
in the present. First the national savings were spent and then when that was
exhausted, the borrowing spree began. What used to be the third world was
anxious to participate because those nations saw it as an opportunity for
their own industrial revolutions and a means to create economic superpowers.
The problem with superpowers is that not everyone can be one; otherwise
there’d be nothing super about it.
In summary, Treasury
Secretary Tim Geithner is currently meeting with other finance ministers from
the G20 to figure out a way to keep this mess going another year.
Geithner’s plan is to create current account targets as a way of
pushing China towards a revaluation of its currency.
targets would be unrealistic,” said Japanese Finance Minister Yoshihiko
Noda, while German Economy Minister Rainer Bruederle rejected a
“command economy” approach. Indian Finance Minister Pranab
Mukherjee said caps would be hard to quantify. In interviews with Bloomberg
Television, Canadian Finance Minister Jim Flaherty said the idea was a
“step in the right direction” and Australian Treasurer Wayne Swan
called it “constructive.”
It is pretty obvious that
the biggest offenders want help and the countries in positions of superiority
don’t have a large affinity for further handouts in the form of
currency revaluations. What is odd is Canada’s position. Canada ranked
#22 in 2009 with a reasonable current account surplus and as such ought to be
averse to such forms of charity. However, Canada’s position is being
formulated by the creator of the tax plan that killed the Canadian Energy
Trusts, so the common sense of his position could easily be called into question.
The central point of
concern at this point is that the race to the bottom in the currency world is
going to start a trade war. This race in currencies is caused by current
account imbalances, which were in turn caused by an avalanche of social
programs and a deindustrialization of much of the First World. While there
are certainly other factors, the causality here should be rather clear.
Until Next Time,
Andrew W. Sutton, MBA
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