Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Current Account Deficit is Still A Drag On the US Dollar

Currencies / US Dollar Jun 20, 2008 - 08:48 AM GMT

By: Joseph_Brusuelas

Currencies Best Financial Markets Analysis ArticleLost amidst recent data on inflation, the rise in oil prices, a deepening crisis in the housing market and the uncanny ability of Goldman-Sachs to outperform market expectations was the deterioration of the current account balance in Q1'08. The U.S. current-account deficit increased to $176.4 billion in the first quarter of 2008 vs. the $167.2 billion recorded in the fourth quarter of 2007. The primary catalyst for the increase was a decline in earnings from foreign investments and the sharp increase in the cost of imported oil. Should such an unsustainable and large deficit continue to persist, the value of the dollar over time could see another sharp adjustment due to the combination of global macroeconomic imbalance and the unwise economic domestic economic policies pursued in the US over the past few years.

In contrast to many market players, economists often pay close attention to the current account balance. The current account is one of the two primary components of the balance of payments, the other being the capital account. Precisely defined, it is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). This broadest measure of trade implies that the US needs to attract roughly $1.9 billion of capital a day from foreign sources to bridge the gap in the current account. That gap, roughly translated, equaled 5.0% of gross domestic product in the first quarter of the year, which is an increase from the 4.8% posted in the final three months of 2008.

Many argue that due to the increasing depth of global capital markets, the damage that one would normally associate with large current account deficits does not necessarily have to follow. Others argue that if the current account deficit is driven by the private sector is not that problematic and that it can even be a virtue for an economy due to the large inflows of capital investment.

So, why should we care about something seemingly as arcane as the current account deficit? First, the type of deficits now facing the US are unsustainable and are linked to large global imbalances that may require non-market actors to set prices in order to facilitate what policymakers, who are often unelected and not-accountable to shareholders, refer to as an orderly adjustment. Such a move away from free market principals will only serve to cause further distortion in the price of the dollar and cannot be guaranteed to succeed.

Under normal circumstances action to reduce a current account deficit typically involves increasing exports or decreasing imports. In developing economies, such a goal may be achieved through import restrictions, quotas, duties or subsidizing exports.

However, the US economy and the US current account deficit cannot by any definition be assigned the label “normal. In a developed open economy, like that of the US, such action runs counter the free and flexible markets that are behind the increase in economic output that we have observed over the last quarter of a century. Thus, under current conditions internationally coordinated action would require placing a floor under the dollar and stimulating demand for US goods and services in Asia and the Middle East. Both lofty goals, that would be at best, very difficult policy objectives to achieve.

Because the prospect of coordinated international action is quite unlikely due to the varied interests that have to be satisfied to obtain such collective action, the policy initiative that has been pursued over the past several years has been purely a domestic endeavor. That policy has been to pursue a weak dollar to make imports more expensive and indirectly increase the balance of payments. Complementing a weak dollar policy to address a current account deficit has been a tolerance of higher domestic inflation vis-à-vis accommodative monetary policy and an increase in spending to favor domestic firms.

Second, social and political fads come and go. Yet, very little changes with respect to the logic of macroeconomics. The current account deficit as currently composed is not sustainable. The fact that it is increasing during a time of relative economic weakness should be some cause for concern. There is no guarantee that a coordinated intervention among central banks to prop up the dollar will succeed over the medium to long term. Just as important, the out of control spending on special interests and entitlement programs in Washington provide an outsized risk to the stability of the domestic economy and the long term viability of the dollar as a the global reserve currency.

In domestic terms, the attempt to derive a correction in the current account through the depreciation of the domestic currency may drive down the price of domestic goods and boosts exports relative to imports, but it also has opened the door to inflation. Instead of attempting to put into place a regulatory framework that provides incentives for pro-growth and savings policies to address the current account deficit or attempt to bring the out of control spending in Washington under control, the US has ushered in a set of policies that will stimulate a period of extended weakness for the dollar.

The weak dollar policy of the Bush administration and the accommodative monetary policy of the Bernanke led US Federal Reserve have been the primary factors that have driven down the value of the dollar. Short term there is a strong possibility that in the context of a Fed on hold in June, followed by a probable ECB rate hike on July 3, the market could observe a sharp reduction in rate expectations for the Fed and with it support for the dollar. We would not be surprised to the see the EUR/USD re-test 1.60 in the coming weeks. Medium term, a non-sustainable current account deficit is but one the primary factors that is behind our call of the EUR/USD to 1.70 and our long-term bearish outlook on the greenback.

By Joseph Brusuelas
Chief Economist, VP Global Strategy of the Merk Hard Currency Fund

Bridging academic rigor and communications, Joe Brusuelas provides the Merk team with significant experience in advanced research and analysis of macro-economic factors, as well as in identifying how economic trends impact investors.  As Chief Economist and Global Strategist, he is responsible for heading Merk research and analysis and communicating the Merk Perspective to the markets.

Mr. Brusuelas holds an M.A and a B.A. in Political Science from San Diego State and is a PhD candidate at the University of Southern California, Los Angeles.

Before joining Merk, Mr. Brusuelas was the chief US Economist at IDEAglobal in New York.  Before that he spent 8 years in academia as a researcher and lecturer covering themes spanning macro- and microeconomics, money, banking and financial markets.  In addition, he has worked at Citibank/Salomon Smith Barney, First Fidelity Bank and Great Western Investment Management.

© 2008 Merk Investments® LLC
The Merk Hard Currency Fund is managed by Merk Investments, an investment advisory firm that invests with discipline and long-term focus while adapting to changing environments.
Axel Merk, president of Merk Investments, makes all investment decisions for the Merk Hard Currency Fund. Mr. Merk founded Merk Investments AG in Switzerland in 1994; in 2001, he relocated the business to the US where all investment advisory activities are conducted by Merk Investments LLC, a SEC-registered investment adviser.

Merk Investments has since pursued a macro-economic approach to investing, with substantial gold and hard currency exposure.

Merk Investments is making the Merk Hard Currency Fund available to retail investors to allow them to diversify their portfolios and, through the fund, invest in a basket of hard currencies.

Joseph Brusuelas Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in