Julie

WASHINGTON - The persistence of bloated U.S. trade deficits over time can pose a risk to the U.S. economy, which thus far has proven resilient, Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) warned Friday. Policy-makers must not get lulled into a sense of complacency, he said.

The broadest measure of trade, called the current account deficit, swelled to an all-time high of $166.2 billion in the second quarter of this year, the most recent period for which this information is available.

"Current account imbalances, per se, need not be a problem, but cumulative deficits ... raise more complex issues," Greenspan said in speech in Frankfurt, Germany. A copy of his remarks was distributed in Washington.

So far, foreigners are willing to lend the United States money to finance the current account imbalances, Greenspan pointed out. The worry, however, is that at some point foreigners might suddenly lose interest in holding dollar-denominated investments. That could cause foreigners to unload investments in U.S. stocks and bonds, sending their prices plunging and interest rates soaring.

The sliding value of the U.S. dollar has made some private economists more concerned about this potential risk.

"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point," Greenspan said. "But when, through what channels and from what level of the dollar? Regrettably, no answer to those questions is convincing," he said.

The U.S. dollar has been persistently weak against the euro — the currency used by 12 European countries. The dollar had dropped to a new record low against the euro on Thursday before bouncing back.

The dollar's slide has been good for U.S. manufacturers because it makes their goods less expensive in foreign markets. But the corresponding rise of the euro makes European goods more expensive in foreign markets.

Greenspan, in his speech, did not specifically discuss the value of the dollar. Although he said that forecasting exchange rates "has a success rate no better than that of forecasting the outcome of a coin toss."

In his speech, Greenspan also didn't discuss the future course of interest rate policy in the United States.

Wanting to keep inflation from becoming a danger to the economy, Fed policy-makers last week boosted short-term interest rates for a fourth time this year. The action left a key rate, called the federal funds rate, at 2 percent. The funds rate is the Fed primary tool for influencing economic activity.

With recent signs that inflation is heating up again after a long cool spell, economists believe the chances are increasing that the Fed will raise rates again at its last meeting of the year on Dec. 14.

President Bush (news - web sites) says the best ways to handle the yawning trade deficits is to get other countries to remove trading barriers and open their markets to U.S. companies. Democrats, including John Kerry (news - web sites), Bush's former rival for the presidency, have blamed Bush's free-trade policies for the loss of U.S. jobs.

Greenspan said that although there's been evidence that "among developed countries, current account deficits, even large ones, have been diffused without significant consequences, we cannot become complacent."

Reducing the U.S. federal budget deficit, Greenspan said, would be an important action to boost U.S. savings. Continued flexibility in the U.S. economy also has been important in the economy's ability to absorb and rebound from economic shocks, he said.

http://story.news.yahoo.com/news?tmp...i_ge/greenspan

barrowaj

We are long past the point of screwed in this area. Drastic measures to either decrease federal spending or increase the budget need to take place soon. The Chinese won't keep funding our current account balance by buying dollars much longer because they are suffering from inflationary tendancies themselves.

Personally, I think China could use this concept as part of a strategy of becoming a world superpower. First they could develop as best as I can by keeping the value of the dollar high (so Americans buy Chinese goods). Then they could completely collapse the American economy by selling all their US capital assets, making the dollar nearly worthless. Without any internal investment or growth, we could not afford to support the military to challenge them.

On another note though, I think the only way for the US to have economic growth is to maintain its technological superiority. Since it is too expensive to produce most things in the US, we have to compete elsewhere. The service sector cannot support the whole of the economy alone because it doesn't allow for as much wealth creation. So that leaves us with technology...

Praxus

I agree and the best way to do that is the keep the Government out of the way of private industry.

Know why that is?

How so?

barrowaj

Actually, government funds are what help us create new technology and advance science. The research done by universities and other institutions funded by government money is usually more speculative, and wouldn't pay off in the short run for companies. Medical research is a prime example of this phenomenon.

Well, there are a lot of reasons why, but the bottom line is the difference in the standard of living between the two countries.

Service industries can't create much wealth because there is not as much room for technological innovation and improvements in efficiency among them. There haven't been major advances in the technology of mowing lawns, selling real estate, or cutting hair. Therefore, those fields aren't really creating wealth. There are counter examples, but I think the growth in the service sector is coming at an expense to other sectors, and not as growth on its own.

Praxus

Any evidence for this?

Can you give me some statistics that state that Government funded organizations produce more "technologies and advanced science" then their equivilent private organization.

More goes into it then standard of living. They may make very low wages but the fact is that American workers are by far more productive. Union Laws however artificially raise the wages of some of the American workers, thus artificially driving up prices, making it hard for US companies to compete. Not to mention massive ammounts of taxation.

What is wealth by your definition?

Parihaka

don't also forget that the high US dollar makes competition on the international markets difficult. the current correction that the US dollar is going through should alleviate that, and make US goods and services more competitive.

barrowaj

No, I don't have any evidence. I'm not sure that there really are statistics out there that could support/disprove what I am asserting. So you can beleive whatever you want. But, I'm not arguing that government funded organizations produce more science and technology, just that they produce the forerunner technologies and the basic science that is required for corporations to develop new products. The best example I can think of is in genetics and cell biology. Corporations do not account for much of the money that is spent researching cell biology and genetics, because there is no payoff in it for them. However, in the long run, a greater understanding of the biological sciences will have a positive payoff because it will help many different companies and publicly funded labs produce many unforseen products that will be profitable.

The microprocessor represents another example of this trend. ICs were originally developed with government funding, and eventually expaned to become a completely new sector of our economy, having huge economic benefits.

Yes, more goes into it than standard of living, but that is the main reason it is cheaper to produce things in China. Even though American workers are more productive (although I think this is due to technology, not simply work ethic) you could not pay an American worker to make products for as cheaply as they are made in China, even if the minimum wage were dropped and there were no unions. This is simply because just to afford to live and eat in the US would cost the worker much more. Regulations cannot be the answer, becuase I would be hard pressed to beleive that communist China has fewer regulations than the US on corporate development.

Well, we've already had this discussion before, and I agree with your definition of wealth. However, I'm just refering to measureable economic wealth.

Praxus

You have absolutely no evidence but you choose to believe it. May I ask why?

The microprocessor was created by a private company (Intel) in order to make a miniture (relitivly speaking) calculater for another private company.

Communist China uses de facto slave labor, that's why they can afford to do it (and no I am not refering to "wage slavery").

The reason "Communist" China is doing so "well" is because they are deregulating.

Any numbers, you would like to show me that shows this?

barrowaj

Earlier in my post I gave one example of basic science research being fundamental to the development of commercial technology. It is a fact that basic science research is primarily funded by the government, and generally carried out by universities. In no way did I say that government money creates more technologies than private money. However, if you stopped government funding of science research, the development of commercial technologies would slow. This is because commercial technologies rely on the developments acheived in basic science that are government funded. Companies are not willing to invest heavily in basic science research because the applications of the research are not necessarily evident. For example, a new discovery in the field of physics could apply to any number of industries, and may not even be useful for the company who made the discovery. However, this does not mean that the discovery is useless overall.

Yes, but the development of the microprocessor would have been impossible without the invention of the integrated circuit (IC) which was funded by the government.

The Chinese do not use slave labor, and they aren't heavily deregulating. To say that the growth in the Chinese economy compared to the US economy is due to more lax Chinese regulations is positively absurd. China still has functioning components of a command economy. That means state run banks decide who gets loans and for how much. They also decide which industrial development projects can be carried out. This is a far cry from the way things work in the US, and yet they are kicking the crap out of us.

Like I said before, I don't have numbers to show you that technological development leads to increased wealth, but since anecdotal evidence suffices for your arguments, I will assume that it can for mine as well.

Praxus

Do you mean to say that public universities per capita do more research in basic science then private universitives do? Got any evidence to prove this?

Almost everything depends on previus developments, I don't see how it proves that the Government is nessecary for technological developments exspecially considering that the vast majority of technological innovations were done privately in the last 200 years.

Yes China is deregulating (I never said "heavily", you did), I don't see how you can get anything else out of the available facts. The US is still growing significantly faster then China. The US economy last year grew by over 350 billion dollars. The Chinese economy only grew 90 billion dollars. How the hell is that "kicking our ass".

That wasn't even the question. Of course technological development leads to increased wealth, I never denied that.

You said however that service oriented buisnesses create less wealth, I'm asking you to prove that.

barrowaj

No, you are misunderstanding me. Public and private universities both have research funded by the government. Just like I said before "These publicly funded research efforts account for most of the basic sciences research." This is a fact, not an opinion, and you can look it up if you want to. The latest edition of IEEE Spectrum had an article that discussed that issue.

We depend on the government for these developments because basic science research is essential, yet not immediately profitable, and not necessarily linked to a specific application. I feel like I keep repeating myself here...

The reason why China is able to grow is from the vast influx of foreign capital. The communist government is willing to do whatever it takes to get that money. They aren't going to let Chinese money flow to foreign investments, however. Only the Chinese government can control foreign investment.

True, but relative to their respective sizes, the Chinese economy has been growing much more than us, and China is not an insignificant country. Futhermore, they are a large stakeholder in our debt, with which we are cheifly using to fund our own economic growth. That means that China is also supporting our economy by propping up the value of the dollar. If they did not continue to do so, we would be faced with economic failure.

If you agree that technological development is the chief source of wealth creation, and that service industries have less room for technological development, then service industries must have less potential to create wealth.

Praxus

No I'm not misunderstanding you. Do you have any information that proves that Universities that don't recieve Federal funding produce less scientific achievements then ones that do. This is what I mean.

Yes and you refuse to prove why you are right. It's not my fault you are repeating yourself.

You are screwing up cause and effect. The influx of capital is the result of the losening of regulations within China. For example do you believe if we pored billions of dollars worth of capital into say Kenya or some third world country in Africa that was not losening it's regulations do you think they would experiance growth rates of 10%?

Why would we be faced with economic failure?

Why do you believe service industries have less room for technological development? What leads you to that conclusion?

barrowaj

Ah, I see. Since nearly all basic science research done by universities is government funded, it is logical to assume that this accounts for most of the research that is done. I don't know what the statistics would be per capita in publicly vs privately funded research, but I would bet they are pretty much the same.

If Kenya completely liberalized its economy, foreign capital wouldn't come pouring in. They don't have the infrastructure, education, or security to provide for the growth. These are all services that are provided by the government, not foreign investors.

The Chinese communist party, on the other hand, has loosened its control of property, and allowed private property to exist enough to get foreign investors interested. The Chinese socialist system is far from a liberal market economy. The state controls the banks, large portions of the energy sector and other industries. They also have a near monopoly on political power. Didn't you hear about the government shutting down thousands of internet cafes a few weeks ago? That doesn't sound liberal to me.

In the end, the Chinese growth was not possible without the government loosening its controls. But obviously the Chinese have more government interference in their economy than the US does, so why are they growing faster? Because of the standard of living issue...

Rapid inflation ==> no foreign or domestic investments ==> no R&D spending ==> loss of technological superiority ==> economic failure.

I beleive that there is more room to innovate in developing new products, such as drugs, computers, etc. rather than simply providing a service for someone. But on the other hand, since you are making the positive assertion, you hold the burden of proof. Why do you think that service industries will be able to sustain economic growth for the US economy?

Praxus

Really? Do you know that "nearly all basic science research is done by Government Funded Universities"?

How does this explain for the fact that in the United States prior to the Industrial Revolution there was very little infrastructure, almost no education system, and constant war against Indian tribes yet the United States with almost no Government help became highly industrialized. All of this growth happened prior to Government funded roads and education.

If Kenya liberalized their economy, that is to say the purpose of their Government was now to enforce the rights of their citizens, they would have a tremendous increase their infrastructure and standard of living and in turn have a great ammount of fourign investment.

[quote]The Chinese communist party, on the other hand, has loosened its control of property, and allowed private property to exist enough to get foreign investors interested. The Chinese socialist system is far from a liberal market economy. The state controls the banks, large portions of the energy sector and other industries. They also have a near monopoly on political power. Didn't you hear about the government shutting down thousands of internet cafes a few weeks ago? That doesn't sound liberal to me.

I never said they had a Capitalist system, in fact I believe they are one of the most brutal dictatorships on the face of the Earth. I am simply saying however that the Growth was the result of the liberalization of the economy. Even you admit this when you conceded that the influx of fourign capital was caused by the the allowance of private property.

They are growing so fast because they started in abject poverty, it doesn't take much but a little liberalization to grow.



What would stop us from going back to the gold standard?

I didn't make any asserition! You are the one making a claim not me, I havn't stated my position at all on the productivity of the service sector.

Gila Monster

You do make a good point there.