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Generational Dynamics Web Log for 13-Aug-04
US trade deficit surged dramatically in July, thanks to high oil prices and a global economic slowdown

Web Log - August, 2004

US trade deficit surged dramatically in July, thanks to high oil prices and a global economic slowdown

Alan Greenspan's June 30 committee meeting expressed concern about a "wrenching" adjustment to rising deficits, but I think even he's surprised at how quickly it's risen since then.

Trade deficit, 2001-Present. <font size=-2>(Source: WSJ)</font>

Trade deficit, 2001-Present. (Source: WSJ)

The dramatic increase in July was caused by a "perfect storm" of several factors: high oil prices are costing us more; a slowing European economy is reducing our ability to export goods; and we're importing goods from China.

Even before July's surge, the June 30 meeting of Alan Greenspan's Federal Open Market Committee, the meeting that sets short-term interest rates, expressed concern about the increases in deficit spending. According to the minutes of the meeting:

The sizable current account deficit could be viewed as reflecting very low levels of national saving, in both its government and private components, in relation to investment opportunities in the United States that were very attractive. The staff noted that outsized external deficits could not be sustained indefinitely. However, the historical evidence indicated that such deficits could be quite persistent, and the adjustment of imbalances was not necessarily imminent. The adjustment, once under way, might well proceed in a relatively benign fashion, particularly if fiscal, monetary, and trade policies were appropriate, but the possibility that the adjustment could involve more wrenching changes could not be ruled out.

The minutes go on to indicate that the Fed can do little to affect external imbalances, but seemed surprisingly pessimistic that even fiscal policy could have an effect:

[The] adjustment would involve shifts in demand and output both domestically and abroad, and changes to U.S. fiscal policy alone probably would not be sufficient to foster the adjustment.

Meanwhile, this week's increase in short-term interest rates to 1.50% from 1.25%, set by Tuesday's Federal Open Market Committee meeting, appears to be having harsh effects, since stocks have fallen sharply in America, Asia and Europe since then.

This should not be surprising. An interest rate increase has immediate effects. Corporate borrowing immediately becomes more expensive, leaving less money for labor and other activities. Monthly job reports have been increasingly grim for three months, and the interest rate increase should negatively affect the next report, due on September 3, the morning after President Bush's acceptance speech at the Republican National Convention.

The FOMC minutes quoted above do not describe what a "wrenching" adjustment means, but one possibility is what Generational Dynamics has been predicting since 2002: A sharp fall in stock prices to less than one-half their current value. (13-Aug-04) Permanent Link
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Generational Dynamics Web Log for 13-Aug-04 US trade deficit surged dramatically in July, thanks to high oil prices and a global economic slowdown

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Generational Dynamics Web Log for 13-Aug-04
US trade deficit surged dramatically in July, thanks to high oil prices and a global economic slowdown