from Follow the Money

I will reenter the fray on monday night

February 6, 2005

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I am still away from my desk, and will not be able to write up my detailed reactions to Greenspan’s latest speech or this weekend’s G-7 until Monday night.

The G-7 communique did not contain any surprises (though the rather public fight on development aid and debt relief was a bit of a surprise). And I suspect my views on the likely course of the trade deficit are also not going to be much of a surprise: I tend to agree more with Rubin than Greenspan. There is a lot of momentum in the expanding trade deficit -- just look at the numbers to date from q4 -- and without a significant slowdown in US growth, I have trouble seeing how the trade deficit, let alone the current account deficit, turns around before 2006.

Since the 2005 fiscal deficit is no smaller (in % of GDP terms) than the 2004 fiscal deficit, the US won’t get any help there. So the 2005 current account deficit can only fall if private savings rises, or private investment falls.

Put differently, the dollar today remains well above its levels in the early 90s, and we have not yet really seen the J-curve phase of trade adjustment (higher import prices mask a fall import volumes). Right now, non-oil import prices are up a bit, but the expanding deficit is primarily the product of strong growth in non-oil import volumes.

If anyone has a scenario that works off the q4 data and still shows the deficit declining, do share -- something clearly would need to change between q4 04 and q4 05 to generate a smaller annual deficit in 2005 than in 2004. The q1 2005 deficit is sure to be much larger than the q1 2004 deficit!

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