Wall Street's Spin-Meisters are at it Again
To quell investor concerns during the inflating dotcom bubble, Wall Street offered soothing commentaries from analysts such as Henry Blodget, Jack Grubman, and Mary Meeker, that explained why the "old economy" rules no longer applied. The latest twist on this "black is white" spin was offered by Bear Stearn's chief economist David Malpass, who in a recent editorial in The Wall Street Journal outlined why in the new global economy borrowing and spending, rather than savings and production, are the true engines of economic strength. Just as Blodget and the gang tried to justify ridiculous valuations for profitless internet stocks, Malpass uses similar logic to justify why America's enormous trade and current account imbalances are good for our economy.
Back in the 1990's, corporate losses were touted as evidence of a bright future. We were told it was a cyber "land-grab" where eyeballs and page views replaced sales and earnings. The calculations were necessary to keep the IPO spigots open and Wall Street profits flowing. Just as red ink was supposedly a sign of strength in the dotcom era, Malpass now tells us that America's gargantuan trade deficits and its lack of domestic savings and real goods production are actually signs of its growing economic might. Investors who buy into this nonsense will suffer the fate of those who bought shares of pets.com.
To rationalize why trade deficits
can be a good thing, Wall Street is pointing to the seemingly
positive benefits of the "capital account surplus"
that mirrors the deficit. On the surface this seems to make some
sense, as most people have positive associations with "surpluses."
The thinking goes that our trade "deficit" is O.K.
because it is balanced by a "surplus" somewhere else.
However, having a surplus of bad things, such as poverty, hunger,
crime, etc, is not a good thing. A capital account surplus is
really a surplus of liabilities. This is not a good thing.
If our capital account surplus is good then by extension Japan's capital account deficit must be bad. The difference between creditor and debtor nations is that debtor nations derive their status by running capital account surpluses while creditor nations achieved theirs by running capital account deficits. Does Wall Street really expect us to believe that a nation is better off being a debtor than a creditor?
The largest part of our current account deficit is the trade deficit. Because Americans cannot afford to pay for all their imports with exports, they in effect buy them on credit. The resulting accumulation of liabilities is recorded as a capital account surplus. However, such surpluses are nothing to brag about. They merely constitute the debts we incur in order to finance our current account deficits.
The situation is analogous to a consumer justifying his purchase of a big screen TV on credit because it is offset by his rising debit balance. The bill the consumer eventually gets is in effect a statement of his capital account surplus. By running a trade deficit with the electronics store, the consumer simultaneously runs a capital account surplus with the retailer as well. He gets their big screen without paying for it (his trade deficit) and the retailer gets his IOU in exchange (his offsetting capital account surplus.)
A corollary to this argument is that America's capital account surplus exists because returns on American assets are superior to those available elsewhere. This difference supposedly induces foreigners to sell us their products so they can earn the money necessary to invest in our assets. This ignores the fact that for the past seven years U.S. markets have underperformed just about every other market in the world. Also the vast majority of the capital account surplus consists of bonds, the majority of which are being purchased by foreign central banks precisely because private investors do not want the lousy returns they offer.
The dangers of America's trade
deficit have been a common refrain in my past commentaries. Rather
than repeating myself here I refer to my commentary from March
of 2005 entitled "Even Stephen
Roach has it Wrong," which contains my favorite analogy
on the subject (six Asians and one American stranded on an island).
In addition, I completely debunk the myth of global dependence
on American consumption in my forthcoming book entitled "Crash-Proof"
which can now be ordered (pre-publication) at:
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
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