I had started this blog in June 2011. Early on it became clear to me that one of the greatest problems of the Greek national economy was the current account deficit. The two principal components of the current account are trade and services. Greece has historically had dismal trade figures because it imports so much more than it exports. If one excludes oil and shipping (which distort the figures), Greece currently imports about €65 billion. The highest figure before the crisis had been €47 billion (2008). Then, Greece imported about 3 times as much as it exported. Today, Greece imports 'only' twice as much as it exports. The trade deficit is currently about €36 billion.
On the other hand, Greece has a very positive balance (€23 billion) with services (mostly due to tourism) which brings the total current account deficit to about €15 billion. That represents about 7% of GDP, which is not as high as the 15% before the crisis (2008) but certainly much higher than the 3% which the ECB considers as an informal warning signal.
Greece and the US have something in common: high trade deficits, positive services balances, overall very high current account deficits. A current account deficit is, accountingwise, a transfer of domestic assets into foreign ownership; a transfer of national net worth from Greece to the rest of the world. Donald Trump has invented the term "being ripped-off by the rest of the world" for this situation. This is obviously a paranoiac interpretation of the situation. The simple explanation is: the Greek economy depends so much on imports because of insufficient domestic production/supply. And it does not generate sufficient external revenue (exports, services) to pay for those imports. Thus, Greece has to borrow offshore to finance the current account deficit.
The US, too, needs to borrow huge amounts offshore to finance their current account deficit. In consequence, the US is nowadays the world's largest debtor with net external liabilities of about $26 trillion.
Within a month of starting this blog, I published an article comparing the Greek and American economies ("Greece - A Comparison with the USA"). One aspect seems indisputable: very high, structural and one-sided current account balances cannot go on forever. Warren Buffett once said: "Everything that can't go on forever will end". For Greece it ended with a sudden stop in early 2010. Given the seemingly endless wealth of the USA, one would be inclined to think that the US can go on forever carrying huge current account deficits. Alas! Donald Trump has decided to bring them to an end.
>"one would be inclined to think that the US can go on forever carrying huge current account deficits."
ReplyDeleteOnly blind people are inclined this way ;-)
The worldwide appreciation of the US $ is vanishing and soon we will see a heavy crash of the US $.
As much as I detest Trump as a person for his conduct, lack of integrity, corruption, etc. etc., I have to admit that some of his gut instincts are good. I have written often in this blog about the US trade and - above all - current account deficits. The first person who had brought this issue to my mind was Ross Perot during his 1992 presidential campaign. 10 years later, Warren Buffett wrote a beautiful article in Forbes about the unsustainable US trade deficit ("Thriftville vs. Squanderville"). I had published this article in this blog. My point has always been the following: a global economy whose overall growth, employment and wealth depends on one country's running up huge current account deficits so that the rest of the world can have surpluses - that can't go on forever. Even if the deficit country has seemingly unlimited creditworthiness. Again quoting Warren Buffett: "If it can't go on forever, it will stop!"
ReplyDeleteHere is Warren Buffett's article: https://klauskastner.blogspot.com/2011/11/warren-buffetts-simple-wisdoms.html
ReplyDelete