America as a bubble stock

Michael Pollak mpollak at
Sun Mar 26 02:42:09 PST 2000

New York Times, Sunday, March 26, 2000


Deficit Attention Disorder

A long time ago, in an economic universe far, far away, people cared

about the trade balance. When the U.S. trade deficit passed $100

billion for the first time, there was much wailing and gnashing of

teeth. Doomsayers warned of an imminent "hard landing" in which a

crashing dollar would precipitate economic crisis. Even calmer types

regarded the unprecedented red ink as a warning sign.

But a funny thing happened on the way to the 21st century: people lost

interest in the trade balance. In January, the Commerce Department

announced last week, the United States set a new world record: the

biggest monthly trade deficit ever. (Is this a great country, or

what?) Measured as a share of G.D.P., last year's current account

deficit (the broadest measure of the trade gap) was wider than ever

before. But the markets couldn't have cared less. They were more

interested in the accounts of MicroStrategy (a high-flying tech stock

that lost two-thirds of its value in one day when it adopted a new

accounting standard) than in those of the United States.

In some ways this lack of interest is a good thing. Obsession with

trade balances has historically been a source of bad economic

policies. It's probably for the best that state governments don't know

whether their trade with other states is in surplus or deficit; their

ignorance keeps them out of mischief. And not paying attention is

almost as good as not knowing.

Still, perhaps we shouldn't be quite so indifferent.

At the moment the U.S. trade deficit is good, not bad, for our

economy. It doesn't cost us jobs because we already have more than

enough domestic demand. We aren't having any trouble paying for

imports: the inflow of money from investors eager to buy into our

miracle economy has easily matched the outflow to pay not only for all

those Lexuses and BMW's, but for the suddenly more expensive oil they

burn too. And this inflow of capital helps keep stocks high and

interest rates low.

Besides, by any other measure the United States is performing

superlatively compared with every other major economy. We have the

highest growth, the lowest unemployment, the biggest budget surplus.

To focus on the trade deficit, you might argue, would be like

short-selling a rapidly growing company because it doesn't pay


But just as even the newest of new economy companies must eventually

justify its existence by returning money to investors, even the most

successful economy must sooner or later export enough to pay for its

imports. Our current position, where we pay for many of our imports by

attracting inflows of capital -- in effect by selling the rest of the

world claims on our future exports -- cannot go on forever. And as the

late economist Herbert Stein declared, "If something cannot go on

forever, it will stop."

The most likely scenario is that the trade deficit will eventually be

reined in by a decline in the foreign-exchange value of the dollar.

The great dollar slide of 1985-87, precipitated by a trade deficit

that was actually smaller compared with G.D.P. than the deficit today,

reduced the value of a dollar by 40 percent in terms of German marks

and Japanese yen. And there is no obvious reason why the same thing

can't happen again.

But if that is the way it will play out, at least some of the money we

are now pulling in is being brought in under false pretenses. Right

now foreign investors are willing to hold 10-year U.S. government

bonds, even though they pay only a slightly higher interest rate than

their European counterparts. Those investors seem to believe, in other

words, that today's strong dollar will persist for another 10 years.

But the size of our trade deficit makes that unlikely. So foreign

investors, and therefore the value of the dollar, are arguably doing a

Wile E. Coyote -- one of these days they will look down, realize that

they have already walked over the edge of the cliff, and plunge. And

when they do it will come as a rude shock not only to them, but also

to American financial markets that have become accustomed to big

inflows of foreign money.

The trouble, you see, is that in economics, as in life, what you don't

pay attention to can hurt you.

Copyright 2000 The New York Times Company

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