Marxist explanations are needed to the current issues
juliohuato at hotmail.com
Sat Mar 29 15:50:37 MST 2003
Paris Commune asks:
>IF the oil (and also non-oil commodities) will be
priced in EURO in the global market:
>- How will it affect the trace/budget deficits and
inflation rate in US?
>- How will it affect the US and global labor market?
>- How will it affect the US economy in general and its
competition power against EU and Asia in global
>- How will it affect the political conjuncture of the
The following materials may help answer your questions:
(1) Alan S. Blinder, "The Role of the Dollar as an International Currency"
in the Eastern Economic Journal, 22-2, Spring 1996.
(2) Catherine L. Mann, "Perspectives on the US Current Account Deficit and
Sustainability" in the Journal of Economic Perspectives, 16-3, Summer 2002.
(3) IMF, World Economic Outlook: Trade and Finance September 2002, chapter
2, "Essays on Trade and Finance," particularly the essay 'How Worrisome Are
External Imbalances?' You may download the relevant portions at:
An updated summary of the dilemmas is provided by BusinessWeek this week in
an article I paste below.
* * *
APRIL 7, 2003
U.S.: Lest We Forget: No Economy Is an Island
When the war ends, the U.S. will need trade partners more than ever
The shorter the war, the better the outlook. That was the theory prior to
the U.S. and British invasion of Iraq. And the first days of fighting proved
it, given the thunderous rally in the stock market and drop in oil prices on
Mar. 21. However, by Mar. 24, the early display of military power and rapid
ground gains gave way to increased enemy resistance, making it evident that
"short" did not mean a week. The markets for stocks, bonds, and oil all beat
an equally furious retreat.
Get used to it. The unpredictable patterns of war are now in full control of
Wall Street and much of the economic outlook, and that won't change until
the end of the war is in sight. February and March economic data are all but
superfluous next to military events in gauging the near-term course of the
markets and the economy.
But there is a new issue in the outlook. Whether the war is short or long,
at its end the White House must either repair its political relations around
the world, especially in Europe, or face the economic consequences of its
unilateral way of thinking. Assuring that the rebuilding of Iraq is a
globally inclusive effort would be a step in the right direction, a topic
that was surely discussed on Mar. 26-27, when British Prime Minister Tony
Blair met with President Bush.
No industrial nation needs increased globalization and its multilateral
trade benefits as much as the U.S. does. The U.S. has long consumed far more
than it produces. The widening trade gap has been financed in part by
foreigners lending the U.S. money by buying American assets. As a result,
the U.S. has racked up a net foreign debt of about $3 trillion, nearly the
size of the German and French economies combined. This puts America in a
position in which it must export more, while also remaining highly dependent
on foreign lending as a source of capital (chart). Against those
imperatives, unilateral policy is economic suicide.
THE BIGGEST IMMEDIATE DANGER from geo-economic tensions is a suddenly weaker
dollar, which would negatively affect U.S. asset prices, lift inflation, and
complicate Federal Reserve policy. Historically, dollar depreciation has
always played a major role in correcting imbalances in international
investment, and indeed, the greenback began to slide lower a year ago. So
far, the adjustment has been orderly. But the war and its aftermath create
the risk that, in a dangerous investment climate, people may be more
hesitant to invest in U.S. assets, and the dollar will suffer.
Over the past year, the dollar's decline has been most acute against the
euro, with a plunge of 25%. Compared with a much broader basket of
currencies, though, the greenback has fallen only 4.5% (chart). Plus, the
dollar is still more than 20% above its level of the mid-1990s, suggesting
room for further downward adjustment in the coming year.
The question: Will the decline remain orderly or become sharp and
disruptive? That's where diplomacy will matter. The currency markets, always
a volatile arena, could punish the dollar if political rifts that threaten
trade and capital flows aren't mended quickly.
The increasing urgency of America's growing external debt and its pressure
on the dollar was evident in the fourth-quarter current account deficit,
which showed a quarterly gap of $136.9 billion. At an annual rate, that's a
record 5.2% of gross domestic product, an unsustainable trend, even given
the U.S.'s high productivity, favorable cost structure, and powerful
position in the world. Also, deficits of that size accruing to only one
country create a threat to global economic stability.
A NEW AND DISTURBING TREND in the current account data is the growing
imbalance of investment income. Because its external debt is so large, the
income from interest and dividends that the U.S. pays foreigners on their
holding of stateside assets now exceeds the income America earns on its
For all of 2002, the U.S. payout of investment income exceeded receipts by
$5.4 billion, the first such deficit ever and a sharp reversal from the
previous year's $20.5 billion surplus (chart, page 28). This essentially
represents the cost of servicing the external debt, and its growth is now
adding its own weight to the current account gap. Worse still, the burden is
growing at a time when interest rates are exceptionally low. As rates rise
in an economic recovery, so will this cost.
And don't expect any relief on the goods and services side of the U.S. trade
accounts. The trade deficit is destined to swell further this year, if only
because the math of the trade gap has become so daunting. Imports of goods
and services are now 1.5 times larger than exports. That means that in the
coming year exports will have to grow 1.5 times faster than imports just to
keep the deficit from widening further.
The experience of the past five years suggests that won't happen. Since the
end of 1997, imports have grown almost five times faster than exports. Last
year, exports grew 4.3%, vs. a 10.1% jump in imports, and that was with
sluggish U.S. demand. If imports increase 10% again this year, then exports
would have to grow by 15% just to keep the deficit stable. Given the somber
outlooks for Europe, Japan, and the rest of the world, that seems highly
SOME ANALYSTS HAVE ARGUED that the U.S. can enjoy indefinitely the higher
living standards provided by a large current account deficit and a strong
dollar. That was a plausible argument during the investment boom of the late
1990s. Back then, U.S. imports were heavily tilted toward capital goods that
yielded greater productivity, profits, and income. But in recent years,
consumer goods, from Chinese toys to German autos, have led the boom in
imports. Capital goods are a dwindling share of total imports, and the share
of foreign-made consumer goods, items which have no future payback, is
If the U.S. has one advantage in its trade conundrum, it's the heightened
ability of U.S. exporters to compete, even at the dollar's high level.
Strong productivity gains are lowering unit labor costs in the U.S. relative
to the industrialized world. For example, when the dollar's exchange rate
vs. the euro and the British pound are adjusted for relative labor costs,
the U.S. gained a 6.5% cost advantage over Germany and a 13% improvement
over Britain from early 2000 to late 2002, says economist Ian Shepherdson at
High Frequency Economics.
Of course, the edge won't matter if U.S. companies don't get a chance to
increase their exports. Globalization is one of those 21st century
catchphrases that can mean many things, but its economic bottom line is the
promotion of greater foreign trade. Global markets must be open to
American-made goods. That condition is crucial to the long-run health of the
U.S. economy. And it's something the White House needs to keep in mind
during its postwar fence-mending.
By James C. Cooper & Kathleen Madigan
Copyright 2000-2003, by The McGraw-Hill Companies Inc. All rights reserved.
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