I've been studying the US market for some time, and by necessity, the Chinese, Japanese & EU as well. There were times when I feared a collapse in the market, at least before I'd get the opportunity to complete my analysis of the market.
I have come to the conclusion that:
- The deficit is a concern but not a critical problem
- Focus on the trade deficit has ignored the structural changes that the US is going through
- The inadequacy of the national accounts in providing an accurate assessment of the market.
The problems as I see them are the following:
- US Structural issues: The US is not addressing some serious structural flaws in its society. The problems are the over-reliance on hydrocarbons for transportation fuels. The US needs a better rail service. Government intervention into the money supply has resulted in a blow-out in property prices, which is fuelling imports, and a decline in the national savings rate. US corporations are 'slashing & burning' US jobs to move production facilities at home with though thought to the long term impact of those moves. They should remember that ex-employees are also consumers of their products.
There are several elements to the US deficit issue, which arise on its several accounts:
- Merchandise Account: The US has experienced a decline in exports, whilst imports have continued to soar. This 'statistical fact' is taken as evidence that the US has lost its competitive edge. This might serve the interests of US companies seeking concessions, hoping to sway public opinion, but it must be recognised that a great many US companies have moved manufacturing capacity offshore. The best indication of this are Capital Account statistics, which records the flow of investment funds abroad, as well as the income received.
- Services Account: The US has also experienced a decline in its services about, though its far better than the trade account. Regardless, we might expect to see the same movement of jobs offshore as consulting, banking, etc is undertaken from regional offices.
- Capital Account: The Capital Account statistics fail to reveal offshore earnings by US companies. Every year, US corporations are increasing investment in offshore markets, recognising that these markets are where the growth is occuring. Rather than repatriating profits to the US (which would improve the Capital Account), these companies are re-investing profits in additional production capacity. We are not likely however to see this until US demand falls. In this case, we might expect the flow of investment funds out of the US, since markets like China remain firmly export-orientated. Without a strong US market, opportunities for growth in China would decline.
Whilst I don't see the deficit as a risk, the is however solid prospects for higher inflation. But thats another story. A 'gold story'.
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