From 1992 to 2005, according to the Bureau of Labor Statistics, the number of manufacturing jobs fell by 16.3 percent in the United States, from 20.1 million to 16.3 million. But the number of manufacturing jobs fell by 24.1 percent in Germany (from 10.7 million to 8.1 million) and by 27.2 percent in Japan (from 15.7 million to 11.4 million).
Chronic trade surpluses were a sign of capital flight, not industrial might. Since 1992, industrial production has increased 11.5 percent in Japan, 18.9 percent in Germany and 59.7 percent in the United States. People in Japan and Germany sold goods to the United States in order to get the dollars they must have to invest in the stronger U.S. economy.
As long as people are free to invest wherever they like, global balance is literally impossible. Yet several economists have made careers out of fretting about "global imbalances." They never define current account surpluses as "imbalances," which puts all the emphasis on belt-tightening among vigorously expanding economies, rather than pro-growth policies among the laggards.
In the process of advocating a Federal Reserve policy "predisposed more toward tightening," Stephen Roach of Morgan Stanley frets, "There is always a chance it's too late -- that America's imbalances are so advanced, the only way out is the dreaded hard landing."
A hard landing means lower stock and housing prices, yet lower asset prices is precisely what Roach wants the Fed to accomplish. In a startling confusion of cause and effect, he worries the United States must "run massive current account and trade deficits in order to attract foreign capital." Investors are attracted to countries because of their current account deficits?
In the words of that previously mentioned AP report, "The concern is that the current account deficit could grow so high that foreigners would become less willing to hold U.S. assets. If they began dumping their U.S. holdings, it could depress stock prices, send U.S. interest rates higher and cause the dollar's value to fall sharply."
That "hard landing" mantra seems to be the equivalent of the phrase "Hare Krishna" for some economists, who never tire of repeating it. But what does it mean? If foreigners "dumped" U.S. stocks and bonds, who would they sell to and how would they be paid? If they could somehow sell U.S. assets only to Americans, then foreign investors would suffer a capital loss at the expense of American bargain-hunters.
Regardless of where the buyers lived, those foreign sellers of dollar-denominated assets would be paid in dollars -- they would have dollar cash and the buyers would have dollar assets. Why would the dollar fall? Not because of the current account deficit, because the hard landing argument insists that if the current account deficit could not be financed then it could not exist. Besides, if there were any connection between current account deficits and exchange rate movements, then it would be child's play to make billions by speculating on exchange rates.
Why would those who supposedly rushed to liquidate U.S. assets in exchange for dollar cash be eager to swap those greenbacks for euro or yen? That might make sense if they wanted to invest in European or Japanese stocks and bonds, yet those markets always collapse whenever U.S. markets merely tumble. In any case, dips in the prices of U.S. stocks make them cheaper and more attractive to world investors, not less attractive.
What about foreign governments? Official capital inflows declined by 48.6 percent from 2004 to 2005, yet nothing noteworthy happened as a result. The inflow of foreign official money invested in the United States dropped from $147.6 billon in the first quarter of 2004 to just $19 billion a year later, but the hard landing crowd did not even notice. When foreign central banks stop buying U.S. Treasury bills and bonds, somebody else buys them. The demand for U.S. bonds is huge, as proven by their low yield.
There are doubtless many things worth worrying about. But the interminable bleating about current account deficits, global imbalances and hard landings is once again sounding remarkably similar to fearing the sky is falling.