Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, April 13, 2005

Trade and Fiscal Deficits:
So Why Aren't People Saving More?

When I read in the NYTimes that

The United States trade deficit expanded in February for the third month in a row, reaching a record $61 billion, as rising oil prices coupled with America's hunger for foreign goods pushed imports to unprecedented new heights,
my reaction was, "How long are foreigners, especially foreign central banks, going to continue to hunger for U.S. dollar-denominated financial assets (e.g. dollars and t-bills)?" As I have said before, I can be convinced otherwise, but I have some pretty strong concerns about what will happen if and when foreign central banks decide not to buy as much U.S.debt.

It turns out that I am not the only one. Here is Charles Mackay of The Wall Street Examiner:

The US trade deficit in international goods and services is now increasing at an annualized rate of more than $200 billion per year. The accelerating trade gap is the primary reason that the US economy has been able to maintain its growth and shrug off higher energy prices. In the past few years, foreigners (mostly foreign central banks (FCBs)) have been willing to finance the expansion of the trade deficit.

That deficit however, can no longer continue to be financed by the FCBs. The total deficit is now well beyond the collective resources of all FCBs acting as group. ... the total current account deficit is now quickly approaching a theoretical limit of free total world savings.
Jack, who tipped me to this article, wonders if now is a good time to buy gold.
Who Links Here