Part1-Postmortem of an Prepared Testimony of Mr. Stephen Roach
Managing Director
Morgan Stanley ...First three lines of the testimony resulted in the following.. I am going to read it very carefully and answer the issues line by line, now I have to attend some work..
<I commend you in the Congress for looking at the US economy’s problems through a global lens. America’s gaping balance-of-payments deficit is but one symptom of the stresses and strains of globalization. The angst of Genoa is another. >
Balance of payment deficit is not a new issue and is not a by-product of IT meltdown, the balance in the current account has swollen from 1998.01 to 2000.4 from 42.3b$ to 115.2bn$ mostly as a result of higher imports. If we closely examine the numbers the facts are different the 1998.01 trade balance in goods was -17.446bn$ now that stands in 2001.03 at -37.644bn$. Trade balance in services is actually a plus for 2001.03 6.470bn$. I have not been able to find the basis of the relationship that he trying to build that America’s gaping balance-of-payments deficit is but one symptom of the stresses and strains of global problems.
In my opinion it is the trade balance of US that is at the core of the issue, and if US is importing efficiently ‘dirty commodities’ that would be environmentally dangerous to produce here, as it will put US in the league of bigger violator of Kyoto agreements, why not to import ‘dirty to produce low cost products’, in other words US imports price stability and cuts its green gas emissions, under what regimes the gentleman makes the point of gaping current account as a destabilising factor when actually if you scratch the skin little deeper that may be the most important factor for the environmentally conscious world, and don’t forget that import from poor and developing countries help US to enable create new buyers. Chinese economy is a bye product of these extensive imports by US, but China on the other hand is also a huge export destination for ‘clean service oriented industry of US. Now, I would have been more impressed if the gentleman and his firm instead of jugglery with numbers would have defined how on earth US is able to finance this kind of current account deficit. Any other nation would be bankrupt by now for running these kinds of current account deficits based on high trade imbalances basically. Why the $ is so strong, natural impact should have been that $ would be sold by the countries who run these huge surpluses, however that is not the case. This means that most of this money is being re-invested in US, the US is the oasis and island of stability for the world capital, the basic reason stems from the fact that US recognises that from Japanese experience of higher savings and running current account surpluses is a recipe of national economic disaster. Other manifestation of house of cards economy being created on such a weak foundation would be inability of US to finance this current account deficit, which would have shown higher long bond yields and increasing federal long term indebtedness. On both these counts the long term yields are lower, $ is safe currency of the world and the outstanding Gross Federal Debt since 1995 is showing a stable trend ..
1995 4.921trilion$
1996 5.181
1997 5.369
1998 5.478
1999 5.606
2000 5.629
and the federal Interest Payments show rather a declining trend..
1995 232,169bn$
1996 241,090
1997 244,016
1998 241,153
1999 229,735
2000 222,825
2001
I have not seen the relationship between interest rates and stable currency to balance of payment deficit, I am assuming here in any economic textbook.
As a lone bystander, I make my assumptions based on manifestations that I expect that this kind of problems should reveal, unfortunately I don’t see any. The countries that have these problems see their currencies head south, their national accounts in disarray and every other day they have IMF doctors prescribing cures. Now that is one extreme but I want to make the deduction that very intelligently what US does that it never discloses the huge amount of the $’s that are lost by foreign investors in pursuits of investments like PCLN. I am trying to make a point that most of this huge $ current account is plugged by inward investments and hence does not pose a problem, like if you remember the 19980’s Japanese will own America fear, the threat from the East and all that crap, the system is working perfectly fine, if you have an efficient country the capital will come to you that is the bottom line and if you can manage your imports in a way that it helps you to import price stability and environmental goals that may be a better choice than pursuit of a surplus in current account. In the need US needs buyers of its products, if it can create a market for world exporters and a global market for listed stocks that are leaders it has addressed the problem. It buy products and sell them shares are US shares not hidden exports? I do remember a great article by Prof Krugman in which he demolishes the myths of ‘deficits.’
Iqbal Latif
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