Growth Deficit

US trade gap a sign of growing economy: Snow,” AFP, http://story.news.yahoo.com/news?tmpl=story&cid=1519&ncid=749&e=6&u=/afp/20050112/bs_afp/useconomytradesnow, 12 January 2005.

‘We are growing faster than our trading partners,’ Snow told reporters,” by “Career Prole,” Democratic Underground, http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=1144233&mesg_id=1144283&page=, 12 January 2005.

Snow says US trade deficit reflects strong economic growth,” Xinhuanet, http://news.xinhuanet.com/english/2005-01/13/content_2452611.htm, 13 January 2005.

Democratic Underground linked to an Agence France-Presse article, which quoted Treasury Secretary Snow

NEW YORK (AFP) – US Treasury Secretary John Snow said the record US trade deficit was the result of strong economic growth and the United States outpacing the growth of other countries.

The impression left by the article? Snow is insane. The first paragraph makes as much sense as saying “Record High Credit Card Debt by Me Sign of Improved Earnings.” Predictably, terms like ‘crazy’ and ‘psycopath’ soon appeared in Democratic Underground. But out of the darkness, one bright light

Another warning to the Europeans!
Snow went on a tour of Europe telling all comers that the problem with the American dollar was that European leaders weren’t “growing their economies” fast enough and he specifically mentioned labor and pensions.

Snow intends to let the dollar fall until Europe pledges to squeeze its workers like we squeeze ours.
He is trying to spread the disease. He wants the whole world to be “China-fied
“.

The spin’s left, but the sentinment’s right. We want a richer world, and that implies Europe actually working.

Background: A strong dollar is like a credit card with a great interest rate. We can buy more than we could otherwise. Because it is so cheap to buy, we can rationally live a bit further beyond our means if we know we will keep growing. This can mean things like cheaper TVs and cheaper cars. If we can offshore some medical work (like X-ray diagnosis) we even get cheaper medicine! Great deal!

On the other side, a weak currency is like a money market with a great rate. You spend less because it makes sense to invest more. Japan, Korea, and China try to keep their currencies low because of this. They have less now, but they can grow much faster because more investment is encouraged.

There are also hidden implications. Because consumption is real, it really affects people’s lives. And the buyer chooses where and how to affect lives. This is most obvious in wars. If our dollar buys more, then everything is cheaper. Uniforms from China are cheaper. Bullets from Taiwan are cheaper. Fuel for our tanks is cheaper. Electronics for Predator unmaned aerial vehicles are cheaper.

It also makes unilateral economic embargoes more effective. We have chosen to punish Iran and Cuba by not buying stuff from them. They feel this.

But there is a cost. We can buy more, but sell less (because our goods are more expensive to both them and us). This hurts the long-term growth of the U.S., and threatens our ability to keep up the game in the future. Additionally, they eventually will want their money back, meaning we have to keep up our growth rate to pay for all the nifty gadgets & wars. And if we can’t sell to them, it’s much harder to grow.

For as much as we complained in the ’80s, Japan is a great friend. They are painfully restructuring their economy to get back to growth. As with the Republicans and Democrats in the U.S., the Liberal Democratic Party and Social Democratic Party fight it out, but all agree on the same basic plan. China, South Korea, Singapore — basically, the rest of Asia, are also on board. But as to old Europe…

The day after the DUer made his observation, Xinhua ran a longer version of the story which backs it up

“The trade gap reflects two things: that our economy is growing at a fast pace and we are growing faster than our trading partners,” Snow told reporters at the New York Stock Exchange, according to reports reaching here.

He also said that the Group of Seven industrialized countries will focus their agenda on the global economy when their finance ministers and central bankers meet in February.

“I think we’ll need more than one growth engine in the world. We need Europe to be an engine of growth. We need Japan to be an engine of growth,” he said.

Snow once again reiterated the US strong dollar policy on Wednesday.

“It’s always the same policy, our policy is the strong dollar. There’s been no change in that from the day I two years ago came into office to today,” he said in an interview on Bloomberg Television.

Everything falls into place. It’s even laid out neatly on the page.

1. We have a trade deficit because you are growing to slow.
2. This means you, Europe. We want you to grow…
3. …exactly as much as we want to keep the dollar strong.

A diplomatic threat. If Europe wants to continue with slow-growth policies, fine. We’ll just stop buying from then.

And there the most powerful feature of a strong dollar of all: we can threaten to make it weak.