Morici: Account Deficit Heightens Risk of Depression
Professor Morici warns that the “U.S. huge account deficit Heightens Risk of Depression.” Beginning with the graph below, Morici, notes that
At 4.8 percent of GDP, the huge current account deficit indicates Americans continue to consume much more than they produce, borrow too much from the rest of the world
The trade deficit will make the recession longer and deeper, and lessen the positive benefits of President-elect Obama’s proposed stimulus package. If Obama does not fix the banks and significantly reduce the trade deficit, stimulus spending will not permanently pull the economy out of recession, and the economy could easily slip into a prolonged malaise or depression.
Simply, money spent on Middle East oil, Chinese televisions and coffee markers, Japanese and Korean cars can’t be spent on U.S. made goods and services, unless offset by a comparable amount of exports. Since U.S. imports exceed exports by almost five percent of GDP, the trade deficit creates an enormous drag on demand for U.S.-made goods and services. Along with the credit crisis and resulting slowdown in new housing and commercial construction, the banking crisis and trade deficit could push unemployment above 10 percent.
Ultimately, the piper will be paid. I have often argued for a dynamic view of comparative advantage. To wit: the monumental trade imbalance will rectify itself, will finally balance, but not after, I suspect a whole lot of hurt. At that point, however, the U.S. will be a dwarf dressed in giant’s clothes.
My point is simple: Such imbalances cannot long be sustained. No country has ever sustained indefinitely such an imbalance. (At one point, the ratio of imports to exports was 2:1.) Credit has its limits. To think otherwise is to play foolish ponzi schemes as you waltz over the cliff.
Our monetary policy was always directed at the consumer. Keep him buying. Paulson knee-jerk initial response was to send out rebate checks. Now, we are about to up that ante.
Our banks, in their greed and mismanagement of credit, have pushed us over the edge. Now, we are fixated on rescuing them. Now we are conjuring up some silly Keynesian notion that government stimulus alone is the answer. But we saved nothing for this rainy day. The jig is up.