3 Ways to Fix the Current Account Deficit

On April 22, 2008 I posted What You Would Expect to See in a Developing Country.

In that post, I referred to the following paragraphs from America, the Next Great Banana Republic written by Richard Backus in January of 2008.

Let's see how the predictions are going so far.

There are basically only three ways to remedy a current account deficit. One is to impose trade barriers in order to force a balance between exports and imports. This is what the IMF and US government have discouraged Mexico from doing. The IMF and US government are committed to "free trade" and are advising all countries to do likewise. In many cases this is not in the best interest of these less-developed countries because they will continue to need protection for their infant industries if they are to survive.

The second way to remedy a current account deficit is to allow a devaluation of the currency making it more costly for its citizens to buy foreign products and making its exports more competitive overseas. The third way is adopt economic policies designed to create recession, which undermines the public's ability to buy foreign-made goods. Unfortunately, if this is done when a country in already in recession, it simply creates a depression with widespread unemployment instead of simply less purchasing power.

In response, I said...

The second way is being tried now. Unfortunately, there are at least three problems. First, as our currency declines the price of oil rises. Paying more for oil makes the trade deficit worse. Second, we're addicted to oil. Our consumption of oil isn't falling nearly as fast as the value of the dollar is. Third, one of our major exports is food. Don't we kind of want to eat it ourselves or is that just me?

I'm seeing a major problem with the third way. Perhaps it is that "if this is done when a country is already in a recession" part? Or perhaps it is the "depression with widespread unemployment" part? Who knows?

September 16, 2009
U.S. Current-Account Gap Shrank Last Quarter on Trade (Correct)

Sept. 16 (Bloomberg) -- The U.S. current-account deficit narrowed in the second quarter to $98.8 billion, the least since 2001, reflecting a smaller shortfall in trade of goods as imports and exports both decreased.

This is good news. We only have $100 billion per quarter to go before things are in balance. We're half way there! Woohoo!

I'm confident that a mixture of all three ways to shrink the current account deficit will ultimately work in the end. We're making so much progress. The annual current account deficit used to be $800 billion a year.

Here's the plan.

We use the first way by placing tariffs on incoming Chinese tires. Check! We use the second way by making our currency as toxic as possible. Check! We use the third way to drive our unemployment up past 10%. Check!

We're using all three ways now! So what could possibly go wrong?

“We expect to see more stable demand going forward so we could see a mild widening of the current account next year,” said David Semmens, an economist at Standard Chartered Bank in New York.

Oh oh. Can't have that. Where is Greenspan's Age of Turbulence when we need it? Fortunately, I'd wager that it is just a matter of time.

Only after the last tree has been cut down. Only after the last river has been poisoned. Only after the last fish has been caught. Only then will you find that money cannot be eaten. - Cree Indian Prophecy