Dan, you mean the World Bank "fires" a warning shot, right?

We've discussed this issue on Dan's board (also over on the Becker/Posner blog) mostly in reference to China and its industrial policy. China, though it has a stake in maintaining a strong American dollar, is a very large economy. Smaller economies with most of their foreign exchange earnings invested in dollar denominated securities could face substantial hardship if the dollar were to weaken dramatically against their own currencies -- it would be like making a loan and being repaid in current dollars at a time of high inflation. The geopolitical consequences flowing from a development like this cannot be predicted with any confidence.

Is Trade Deficit really harmful?

Zathras -- yes, I meant "fired." Fixed now.

People have been worring about the U.S. current account and budget deficits for almost 40 years but disaster never seems to overtake us. Right now the dollar is near its lowest point of the past 40 years (it traded a bit lower in the early 1990's and in the 1970's). The New York Times in its lead editorial on April 2 confidently pronounced that the dollar has no where to go but down. All this doom and gloom on the dollar will be proven dead wrong. Sell your villa on the Rivera and buy in Palm Springs.

The sky is fall..? The sky...? The sky IS falling..? The..? THE SKY IS FALLING! THE SKY IS FALLING!!! oh wait...

As an expat living in Asia and paying off credit card debit to MBNA... I, for one, welcome our failing dollar-denominated asset overlords.

People have been worrying about the U.S. current account and budget deficits for almost 40 years but disaster never seems to overtake us. -- C Futia

Well, the reason it hasn't happened is because of socialism. The gov'ts of Japan, South Korea, and now China have been willing to prop up the dollar for decades. But that doesn't mean we can blow up the deficit forever and live offf the Asian dole, or are you suggesting that there is such a thing as a free lunch?

Dan
The reason we are in this predicament is our insatiable demand for foreign produced goods and services. Feeding that demand is the offshoring of services like...
Programming.
Journalism (see Reuters).
Radiology.
Software Design.
So we hand them our dollars to pay for these services, and they don't buy anything with them - except for things like oil from the Middle East - which continues to be denominated in $$$ (or have the Saudis switched to Euros yet?)

Your a big fan of offshoring, Dan. So tell me: how is this scenario supposed to play out?

"But that doesn't mean we can blow up the deficit forever and live offf the Asian dole"

We havent been blowing it up forever. Our deficit has been at approximately 3% of our GDP for most of the 80s, 90s, and 00s. Which is right in line with much of the Western world (I believe our deficit was a smaller percent of GDP than France's until this year). As far as the Asian issue, it shouldnt be surprising. They know a good long term investment when they see it. For those freaked out over China, Japan should be a object example. We were having this _exact_ argument over the power of Japan during the 80s. Forget about monetary policy vis-a-vis China and start worrying about long term fundamentals a 2 billion person market brings to the table.

Carl Futia:

"People have been worring about the U.S. current account and budget deficits for almost 40 years but disaster never seems to overtake us."

Carl (another Carl, I take it):

"Well, the reason it hasn't happened is because of socialism. The gov'ts of Japan, South Korea, and now China have been willing to prop up the dollar for decades."

No game goes on forever and this game will certainly end someday, whether with a bang or, as the fellow says, by slow declension from the Age of the Antonines. That's a truism. The interesting question, as always, is when will the game be over? Alas, to that question answer comes there none (except the not very useful one that when it does happen we'll know it.)

Scott Kirwin:

Could you supply some data to support your assertion? How large are net expenditures on offshoring/outsourcing (remember, you have to subtract any services offshored from other countries to the US), relative to our GDP?

If you cannot supply such data, please admit that your assertion is baseless.

Thanks.

DHB
The only data I need to support my assertion is a ballooning trade deficit and a declining surplus in services. Last I checked the services surplus was $11 billion. Now it's $4 billion. (source:http://www.census.gov/foreign-trade/Press-Release/current_press_release/ftdpress.pdf)

The numbers you are requesting don't exist, and every attempt made by organizations such as my own, The IT Professionals Association of America (ITPAA) are rebuffed. We have been told that issuance of these numbers by firms in the private sector could be used by competitors to determine the health of the companies - as if stock prices don't already do this.

If you are so keen on learning these numbers, feel free to join us in our efforts to force Congress to mandate their disclosure.

"As far as the Asian issue, it shouldnt be surprising. They know a good long term investment when they see it." Mark B.

I'd feel more confident if it were private investors who know a good thing when they see it, and not the gov'ts. Most of those gov'ts are trapped into investing in us because they've played the same mercantilist game for decades and don't know how to stop. But our budget deficit is close to 5% GDP, and our current accounts deficit is 5% of GDP despite a large drop in the dollar. The Central Banks are not going to tolerate losses like this forever. (They don't even have to dump their T-Bills for a crisis to develop, just stop buying them).

If we were planning on doing something about this, I wouldn't be concerned, but we're not.

And contrary to your implication earlier, the sky does fall sometimes. Just in the past 10 years it has fallen on South Korea, Argentina, Indonesia and Russia, as well as other economies. There's no reason it can't happen here if we continue the way we have.

      The dollar is falling?  So what?

      As long as China, Japan, and Korea want to have export surpluses in their U.S. accounts, they have no choice except piling up U.S. assets.

      The U.S. began running balance of payment deficits in the late 50's.  After nearly half a century without disaster, I can't seem to worry about this time either.

THE SAUDS MUST BE DESTROYED!