Dr. Art Laffer is a hero of mine. He truly is the father of supply-side economics and his "Laffer Curve" (a sideways parabola drawn on a napkin) was the economic heart of the Reagan Revolution in economics. I signed up at YorktownUniversity.com just so that I could take a course from him.
Today he calls for bold laissez-faireism in the dollar and current account deficit "crises." He refers to the trade deficit as "The Capital Surplus;" it's not a euphemism, it's a better descriptor:
WSJ.com - Destination U.S.A. (Paid site, sorry!)Just because the United States has its largest trade deficit ever doesn't mean that we're living beyond our means. Far from it. In fact, the characterization of the U.S. as a land of chronic overspenders, hellbent on selling themselves into global servitude doesn't make sense at all. And once the over-consumption model is put into question every policy remedy based on the presumption of squander looks pretty weak.
In an era of floating exchange rates the trade deficit (or more appropriately, the current account deficit) is one and the same as the capital surplus. The only way the U.S. can have a trade deficit amounting to 5.6% of GDP is if foreigners invest that amount of their capital in the U.S. It's a matter of simple accounting. But once you realize that the trade deficit is, in fact, the capital surplus you would clearly rather have capital lined up on our borders trying to get into our country than trying to get out. Growth countries, like growth companies, borrow money, and the U.S. is the only growth country of all the developed countries. As a result, we're a capital magnet.
Take a look around. Germany hasn't had a growth spurt since the 1960s when Ludwig Erhard was Bundeskanzler. France still has a mandated maximum workweek of 35 hours, a maximum income tax rate of 58%, a 1.8% annual wealth tax and government spending as a share of GDP greater than 50%. Finland, for goodness sakes, fines speeders a percentage of the speeder's income. Sweden, Denmark and Germany also fine speeders a percentage of their income, only with caps. Japan has had a stock market down by over 70% from its high in 1989 and both company and government unfunded liabilities in Japan are out of sight. Canada's economic policies are kooky and investments in Latin America, the Middle East, Russia, Southeast Asia and Africa are about as safe as running drunk blindfolded across the "I-5" freeway at rush hour.
So what's not to like about the U.S.? Whether you're an American or a foreigner the U.S. is the choice destination for capital. That's why we have such a large trade deficit.
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But even changes in exchange rates have limits. The dollar under current circumstances can't go to zero or infinity. Without a corresponding rise in domestic dollar prices, U.S. goods and assets become relatively more attractive to foreigners and Americans alike when there is a fall in the foreign-exchange value of the dollar. Sooner or later the dollar would be such a bargain that there would be more buyers than sellers, therefore limiting the dollar's fall. Today, the dollar's value in the foreign exchanges fits nicely within its historical range.On Jan. 1, 1999, the euro was born and was worth $1.17. In fact, if we look at the synthetic euro prior to 1999, the dollar's low was in 1992 when each euro could buy $1.47. The large dollar appreciation from 1992 to early 2002 saw the dollar peak at 83 cents per euro and our capital surplus (the trade deficit) go from less than 1% of GDP to almost 4% of GDP (and continue on to today's 5.6%). Well, the global economic environment is changing once again as are investors' perceptions of relative attractiveness.
I might quibble with a lesser icon over his respect for ECB head Jean- Claude Trichet. I think a little more liquidity in the Euro would fuel growth for Europe and ease dollar-stress.
Holler if you want me to mail you the whole article: jk [at] berkeleysquarejazz [dot] com.