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April 21, 2008


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"current-account surplus?"

W. Raymond Mills

A better measure of the Current Account Deficit, one that eliminates change in currency value, is the share that the trade deficit has of imports (limited to merchandise, to reflect change in exports). The share was 39% in 1986 and 1987. It was 47% in 1985 but down to 40% in the last part of 2007, due to growth in exports. We still have a long way to go to get down to a tolerable level of the 24% level experiences in the "golden era" - 1994- 1997.

Exports were 8.3% of GDP (current dollars) in the years 2007, 1997 and 1980.

The rest of the world is whipping our butt in exports. U.S. share of world exports (WTO data) went from 12% in 2000 to 8.6% in 2006.

The low level of the foreign exchange value of the dollar will help exports but not enough. Further declines in the value of dollar will take us into new territory. Cummulative causation may take over. Declines feed on declines until the dollar is not sought by foreigners, resulting in higher interest rates in the U.S., making any production in the U.S. expensive.

I advocate governmental intervention in total volume of imports, to reduce their level to something closer to exports. That is the only way I see to avoid the coming meltdown in U.S. financial assets. Imports can be reduced in a way that reduces the trade deficit without resort to portectionism, as that terms has been defined historically. I realize that most folks think that classical protectionism is the only alternative to free trade, but they are wrong.


I am not convinced the plunge in the value of the dollar will necessarily lead to the reduction in the US current account deficit. For one thing, this may styfle the world economic growth and thus reduce demand for the US exports abroad. More importnantly, falling dollar may continue to prop up the price of imported commodities, the demand for which is pretty inelastic. If I am not mistaken, the last economic data shows that this is precisely what happens: the US economy does not benefit from depreciating dollar.

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