At the link below you will find an exceptionally clear description of
how the people who manage one aspect of our economy think, or say they
think, it works. The writer, Richard Clarida, is assistant
secretary for economic policy at the US Treasury. The topic is the
"Trade Deficit" or "US current account deficit" as it is technically known.
Despite the limited view of the causes and consequences of the conditions
he discusses, his discussion is interesting and informative.
America's deficit, the world's problem
The essence of the matter appears to be that the strength of our economy, especially our labor surplus, productivity, and political and financial stability, lets us get away with importing cheap goods, and paying for them by selling our capital (productive capacity) at a price advantage. That price advantage is supported by the stability and dominance of the dollar. And especially by the relative "unattractiveness" of the developing economies as a place to invest - largely courtesy of "perpetual war" and social unrest over there. It is a pretty decent racket, if you can keep it going....
Seasoned observers will recall that the Reagan administration used the same methods to manage very large deficits in the US budget; relying on instability in other societies/economies to create a flow of funds from them into the US to cover our deficits; minimizing what would otherwise have been a serious inflationary load on our economy.
In other words. . . we can cut taxes for our wealthiest class, increase defense spending, and the resulting budget deficits will not be inflationary so long as other economies are less desirable as places to invest than is the US. Under these circumstances, stability and economic growth in these economies would be markedly disadvantageous to the Shrubbyist originators of our economic policies.
A side benefit to the Shrubbyists is that instability and economic stagnation in the developing world work to their advantage in other ways as well, by increasing the leverage of the IMF and Wold Bank over these economies - they have to borrow back the capital which has been exported to the US, and conform to the terms of the borrowing to get it. Typically, these terms include the imposition of politically destabilizing austerity programs, a la Argentina in recent months.
This creates a vicious cycle of exporting capital instead of investing it locally, reduced productivity, economic stagnation, and decreased social welfare and political stability - a breeding ground for ignorance, fundamentalism, nativism, despair, and terrorism. Naturally, that even further reduces the desirability of reinvesting of profits in the local economy, virtually eliminates any hope of attracting foreign investment, and increases the export of capital to the developed nations, especially those with high interest rates (or lower inflation than locally), such as the US.
Not that the exporters of local funds are particularly handsomely rewarded. Richard Clarida notes that though the US foreign indebtedness amounted, in 2000, to 20% of its GDP, the cost of servicing that debt was .6% of the 'principal'. (This is substantially less than even the low rate of US inflation in 2000, resulting in a negative real interest rate, if I understand that relationship correctly.)
Soon only IMF and World Bank loans are available to keep the local government running.
A longish page with a lot of information on this, and much more, is available at "Mapping the Real Deal" by Catherine Austin Fitts http://www.sandersresearch.com/html/MappingtheRealDeal/CAFAugust02/CAF080802.htm
And do NOT believe that BS about there being no difference between Democrats and Republicans in these matters. Besides noting the similarity of Shrubbyist and Reagan policies in domestic budgetary and other policies affecting this area, and their contrast with Democratic policies, remember that Bill Clinton prevented the meltdown of the Mexican Peso by extending credit directly from the US Treasury, much to the disgust and distress of the former Reagan - now Bush people currently controlling our government.
Never doubt that they had reason to hate him.
Do not doubt either that the overall effects on other nations of the policies of Clinton vs. those of the Reagan/Shrub bunch are vastly different in this area of foreign affairs and trade where so many "progressives" see them as indistinguishable. In their effects the Clinton - Rubin policies of running domestic budget surpluses, reducing interest rates and paying down the debt are diametrically opposed to Shrubbyist policies. They greatly reduce the need to destabilize the societies and economies of developing nations so as to decrease the attractiveness of investment in them and attract capital to our own. The Clinton - Rubin policies permit a positive cycle of increasing investment, productivity, economic growth, with increasing social welfare and stability in these developing nations.
What a contrast this is to the two years of Shrubbyism we have witnessed
the history and workings of the international financial system can
be found here:
Big Chart -
May, 2003 - Volume begins thinning at prices above 8200.
October 2002 - Trading volume and price change relationships out of whack!
Trade Deficit and Dollar Valuation - This
page done in October
needs a note added about current changes in exchange rates, and what that
implies for the October assertions and analysis. For now, it
seems the dollar is no longer strong enough to assure that foreign
funds will flow into the US rapidly enough to cover our trade deficit,
but it is weakening enought that our current accounts deficit may decrease.
There is a lot more to the story than that though.
Today's Motley Fool DJIA "big chart" looks good (10/22) -- however look also at the volume. Decreasing volume on a rising market, indicates a thinning market, no real pressure behind the rise. If a decreasing market were to show increasing volumes..... trouble. (Look carefully at volume/price relationships - decreasing volume as prices increase - since the weak "rally" the first week of July, also in the first week of September. Ugly! Watch this long enough, and you might see a price level which starts bringing buyers into the market - where trading volume begins to increase... which might indicate a real 'support' level or bottom.)
At http://research.stlouisfed.org/fred2/series/WLTA you can see the sudden, very sharp upturn in long term interest rates since Sept. 27. If an increase in LT rates were to extend to mortgage rates, increasing them enough to break the housing market, and then the valuation of the housing stock -- the last remaining prop holding up the economy generally would have fallen.
Sept. mortgage rates were about 1/3 the 1981 rates, and the lowest in at least 30 years, so such an threat is "real but not imminent". These low rates have kept the housing market going despite economic slowdown in other areas. How sensitive the market would be to an increase in rates is anyones guess.
If effective long term interest rates continue to rise in a low inflation, increasing unemployment economy (Growth gauge continues its losing streak) that would seem to indicate the financial markets are discounting anticipated future inflation... in other words are expecting a round of "stagflation" such as occured in the late 60's and early 70's, when the economy was stagnant, unemployment high, inflation high, and the stock market flat. After breaking down in '73 the stock market did not really begin performing again until late '82 or '83 if I recall correctly.
That round of stagflation, and a generation of high interest rates, was caused by Johnson's desire to have a war in Viet-Nam, without paying for it. Anticipation of another such is probably related to the Bush "perpetual war" deficit, compounded by a tax cut (of which 40% goes to the top 1% of the population).
So far, I have not modified my estimate that the recent rise in stock prices is in a thin market and is driven by a desire to prop up the market numbers before the election.
Here is a note on current financial statistics, including interest rates, household debt, and the money supply.