Friday, November 05, 2004

It Won't Be Long Now...

In reality, the deficits are making the United States a less attractive place for investment. That is why the dollar is dropping and one of the reasons that the stock market is under pressure.

Just a few days ago the US Treasury reported that the net capital inflows from the rest of the world into the United States fell for the 6th month in a row. Private from abroad fell to $34.7 billion in August and from $72.9 billion in July. Asian central banks made up for the shortfall. If they hadn’t, the current account deficit would have exploded.

The NY Times quoted Ashraf Laidi, a currency analyst at MG Financial Group as saying, "foreign central banks saved the dollar from disaster. The stability of the bond market is at the mercy of Asian purchases of US Treasuries."

The current account deficit has grown so large the foreign investment coming into the United States is no longer creating economic growth. Although the United States is taking in 80% of the world’s surplus savings it is all being used to finance the deficits.

According to Stephen Roach, the head economist of Morgan Stanley, the deficits are growing so large that by the end of the year America’s indebtedness to other countries will reach 28% of GDP.

That would bring the US indebtedness to a level of 300% of exports. Argentina and Brazil were at 400% right before they collapsed in the 1990’s.


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