The US Trade Account

The LDCs and the weaker OPEC countries experienced economic
depression in the early 1980s as oil and other commodity
prices collapsed. It was a stock Kondratieff downwave that
was eclipsed from going fully global by timely major
central bank intervention, large US income tax cuts and a
relaxing of regulations regarding the writeoffs of non-
performing LDC/OPEC credits.

The US had been the lender of last resort. Now it had to
become the buyer of last resort to stave off spreading depression.
The original global rescue plan called for three locomotives to
pull the world back from the abyss: The US, Germany and Japan.
Between 1983-87, Germany and Japan welched on the deal, leaving
the US to carry the load. The strong US $ policy of 1980-85
did the trick, but the US began to run a deep trade deficit.
A weak US $ from 1985-95 reversed this situation, and by 1991-
92, the US was running a modest surplus on current account.

Powerful US economic fundamentals over 1995-2000 produced a
dramatic rally in the dollar which actually ran until 2002.
At first, both imports and US exports were strong, but export
growth faded and the trade gap again accelerated. Moreover,
it continued to grow rapidly even as the dollar tumbled from
2002-2005. The elixir to eliminate the current account deficit,
namely a weak US $, failed. Many exporters, China notably and
much of the rest of East Asia tied their currencies to the dollar,
while Europe and Canada gave up profit margin to maintain market
share.

Strong US interest in "free" trade has a long term objective.
We know as the massive baby boomer cohort passes into the
retirement years, US consumer purchasing power will moderate
very substantially. The hope is that exports will pick up
a fair portion of that slack and that countries like China
and India will eventually focus on growing their own
consumer economies.

All the countries who export to the US know that the consumer
will soon be past his prime, spending wise, and it is
Katy bar the door to sell as much into the US as they can
before demand slackens.

Only time will tell whether our policy aim will prove effective.
However, it seems to me that the next 5-7 years are going to be
difficult and risky on the trade front. Big US companies like
Dell and The Gap have large offshore production which they
distribute here. So the open market concept benefits many major
US companies. But smaller companies -- the backbone of US job
creation -- will be at increased risk as more niche markets
come under attack from abroad. On the flip side, the US is
exporting $ liquidity to the tune of nearly $800 billion a year.
Foreign currency reserves are ballooning, and the risk of
all manner of speculative excess abroad is rising rapidly.
Japan went bananas with this liquidity in its real estate and
stock markets in the 1980s and it has only been recently that
it has regained a comfortable degree of equilibrium.

When an exporter to the US locks its currency to the dollar,
it is engaging in a form of mercantilism. The US should
hammer China and the other bandits that are keeping
currencies artificially low. But it has chosen to let it all
happen so large US corporate and banking interests can prosper
abroad. This is a dumb policy that will hurt smaller
domestic interests as well as the overconfident foreign
treasurers who think they can manage mushrooming liquidity
with ease.

So we have to keep eyes on the trade sector, particularly
throughout developing Asia as the central banks out there
have yet to show their mettle.

The more one watches major US business interests, the more one
is reminded of Ike's admonition to watch that military / industrial
complex.