Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

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

6 Critical Money Making Rules