***** A trade deficit must be financed by net borrowing from the rest of the world. The United States was effectively spending about 5% more than it was producing last year, but cannot continue to borrow at such a high rate indefinitely. Worse yet, the trade deficit is growing each year as a share of GDP. The recent decline in the value of the dollar -- which has fallen by 11.5% since February 2002, primarily against the Euro -- indicates that foreign lenders are less willing to supply new credit.
If the dollar were being supported by demand from investors who find the U.S. market attractive, then steady growth in capital inflows from private investors to finance rising deficits would likely occur. However, private inflows have fallen in the last two years. Instead, foreign governments have been intervening in foreign exchange markets by purchasing a rapidly growing volume of U.S. government assets (shown as foreign government assets in the United States in the figure below). These inflows reached $208 billion in 2003, or 38.4% of total capital inflows. Official government inflows were 50% of the total in the fourth quarter of 2003.
Asian governments made 93% of all government purchases of U.S. assets in 2003. Other governments were not intervening significantly in foreign exchange markets because they expected the dollar to fall and did not want to make money-losing investments. Asian governments, especially Japan and China, are willing to absorb these risks in order to support their exports to the United States1.
("Foreign Government Intervention Keeps the Value of the Dollar Artificially High," March 22, 2004, <http://www.epinet.org/content.cfm/webfeatures_snapshots_archive_03222004>) ***** -- Yoshie
* Bring Them Home Now! <http://www.bringthemhomenow.org/> * Calendars of Events in Columbus: <http://sif.org.ohio-state.edu/calendar.html>, <http://www.freepress.org/calendar.php>, & <http://www.cpanews.org/> * Student International Forum: <http://sif.org.ohio-state.edu/> * Committee for Justice in Palestine: <http://www.osudivest.org/> * Al-Awda-Ohio: <http://groups.yahoo.com/group/Al-Awda-Ohio> * Solidarity: <http://www.solidarity-us.org/>