Tuesday, September 11, 2007

How the U.S. economy remains afloat

What does it mean that the US has a $800 billion trade deficit? It means that Americans are consuming $800 billion more than they are producing.

How do Americans pay for it? They pay for it by giving up ownership of existing assets--stocks, bonds, companies, real estate, commodities. America used to be a creditor nation. Now America is a debtor nation.

Foreigners own $2.5 Trillion more of American assets than Americans own of foreign assets. When foreigners acquire ownership of US assets, they also acquire ownership of the future income streams that the assets produce. More income shifts away from Americans.

How long can Americans consume more than they can produce? American over-consumption can continue for as long as Americans can find ways to go deeper in personal debt in order to finance their consumption and for as long as the US dollar can remain the world reserve currency.

Americans have increased their consumption by dropping their saving rate to the depression level of 1933 when there was massive unemployment and by spending their home equity and running up credit card bills.

Foreign governments and investors are diversifying into other traded currencies. As a result, the dollar prices of the Euro, UK pound, Canadian dollar, Thai baht, and other currencies have been bid up. In the 21st century, the US dollar has declined about 33 percent against other currencies. The US dollar remains the reserve currency primarily due to habit and the lack of a clear alternative.

[Excerpt of an article by Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration, and Associate Editor of the Wall Street Journal editorial page.]

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