Wednesday, June 18, 2008



Yesterday the Bureau of Economic Analysis released its estimate of the U.S. current-account deficit for the first quarter of 2008
( The lead sentence said:

“The U.S. current-account deficit--the combined balances on trade in goodsand services, income, and net unilateral current transfers--increased to$176.4 billion (preliminary) in the first quarter of 2008 from $167.2 billion (revised) in the fourth quarter of 2007.”

Today’s currency trading closed at $1.555 per Euro. That’s not a record low, but the dollar has fallen dramatically over the last five years.

What’s the connection between yesterday’s report on the current-account deficit and the weak dollar?

You can see the current account’s steady erosion in the following chart.

Current Account

(Click on chart to enlarge)

Recessions shaded

The dollar has not fallen as precipitously, but the trend is the same: Downward.

Once again, why?

Because we are so fond of importing goods from the rest-of-the-world. We are continually willing to offer more dollars for a Euro (and other currencies) so that we can buy more goods denominated in Euros (or other currencies): Whether that’s autos or oil. Then the rest-of-the-world reluctantly accumulates those cheaper dollars that it acquires by selling goods to us.

Occasionally, such as in the early 1980s and late 1990s, the rest-of-the-world enthusiastically invests in the U.S. That temporarily drives the dollar’s value up as the rest-of-the-world purchases dollars to buy into our stock market. But when the boom ends, the dollar’s value falls. One way or the other, the current-account deficit grows.

If you update the chart above in your mind’s eye with the latest current-account-deficit of $176.4 billion, you will notice that the current-account-deficit’s plunge has temporarily halted. That’s typical for an economic slowdown here. You can see that the line heads north in recession, as falling U.S. incomes reduce U.S. import demand. Recovery from recession has always resuscitated our desire for imports and restarted the current-account-deficit’s slide.

The dollar’s deterioration may also abate for a while as we purchase less from abroad. But that’s small relief from a long-run trend. If you want what the rest-of-the-world sells, you will offer more of your currency to purchase a unit of their currency. That’s what we have been doing for some time.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

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