The U.S. Current Account Catastrophe

This article will point out the consequences of a continuation of the U.S.'s mammoth current account deficit. Some believe that stock market and direct capital investments will continue to resolve this problem. These investments, in the long run, make matters worse. They simply represent an asset transfer to compensate for excess consumption. Repatriated profits and dividends will in fact result in a permanent increase in the current account imbalance. The same reasoning applies to government bond and real estate purchases. In a surprisingly short time period this will result in the ruination in the value of the dollar and consequent drastic reduction in the standard of living in the U.S. for rich and poor alike.The U.S. current account deficit will soon exceed seven hundred billion dollars and ,considering present trends, will continue to grow. China's automobile manufacture,which is now in its infancy but growing rapidly, may provide serious competition to U.S. manufacturers if only on a local level. Also China's agricultural products which are just now beginning to be widely available worldwide could quickly provide serious competition overseas for american producers. At the same time, the industrial base in America continues to shrink with a steady loss to China and other Southeast and South Asian economies.If the current account deficit stabilizes at “only” 700 billion dollars and continues for just 14 more years, U.S. citizens will have experienced net debt or asset transfers of close to 10 trillion dollars. If all the stocks on all the U.S. stock markets are valued at 14 trillion dollars, and if current ownership of these stocks is about 25 percent foreign, with the 10 trillion dollars of accumulated current account dollars the holders of these dollars could purchase outright every single U.S. stock-market listed company. The companies generating the bulk of the U.S. GDP would then be foreign-controlled with potential serious political consequences(and potential tax revenue consequences as well). To make matters worse, control of any company can be effected with only 25 or 30 percent ownership of the company's shares. That would mean that foreign dollar holders, instead of needing 10 trillion dollars to attain control of all the current companies listed, would require less than 3 trillion dollars, an attainable goal within 5 years.This result is premised upon a concerted effort by the current-account beneficiaries to spend all their current account surplus on these stock market securities. Currently, most of these dollarholders are purchasing U.S. Government debt securities with their current account earnings but, at these ultra-high current account losses, even these government securities could be quickly bought up or otherwise unavailable for purchase. That is, unless the U.S. Government is willing to go into much higher levels of the Federal budget deficit, now standing at less than 300 billion dollars.Debt instruments issued to cover the federal budget deficit are currently being used as banking assets by the U.S. Federal Reserve in its efforts to regulate the U.S. money supply. The Fed competes with these foreign dollar holders and commercial banks in the purchase of these government debt issues. In fact, the Fed can only purchase these debt securities in the open market after they are originally auctioned off. This problem, a shortage of purchasable high-grade securities, could be alleviated somewhat if both the Fed and foreign dollarholders would accept blue-chip corporate bonds as official assets. In any case, both government and corporate debt instruments have finite limits and, based upon these ultra-high current account deficits, could be quickly exhausted. As the various options of where to place foreign earnings run out, these foreign dollar holders will resort to buying U.S. real property, putting home ownership even further out of reach for the first-time American buyer.A last resort would be the dumping of these dollars on the foreign currency markets causing a drastic drop in the value of the dollar. No one wants that, especially the foreign dollarholders. Most foreign governments want a highly-valued dollar in order to maintain their relative advantage in world trade.If nothing is done over the next 20 or 30 years, all these various assets in the U.S., namely real estate, government debt securities, and corporate shares, will be largely foreign-owned. The typical U.S. citizen will be working for a foreign-owned and foreign-managed company. With few purchasable dollar assets available, any further current account deficits would most-likely result in a decrease in the international value of the dollar. The dollar would start to appear “worthless” and would drop in value irrespective of actions by foreign governments or the U.S. administration. Overseas, this would result in the ruination of the money supplies of a considerable numbers of countries whose reserve assets are in dollars. And, last but not least, it would result in a drastic lowering of the standard of living for all American citizens.The big question is when will the current government face up to this problem and do something about it.