Excessive Spending - What goes around

I've gotten a number of emails about my post of March 18. My position was that certain types of trade are not necessarily beneficial to the U.S.... but the debate seemed to get sidetracked around Canadians mowing lawns versus countries 8,000 miles away.

One gentleman, Roland Patrick, suggested that there was no trade problem and that could be explained by a simple example: we buy from wine and cheese from France, they buy electronic products from Japan, and Japan buys apples and Jack Daniels from us... and we all get along fine and prosper.

My position is that it isn't quite working that way. The current account deficit of $0.6 trillion... or $600 billion... or $600,000 million... means that the product we seem to trade best to the world is currency... not manufactured goods or services or intellectual property. The government prints them and we spend them. And the world continues to accumulate them. Then what?

1. they buy U.S. government backed notes and convert currency into U.S. debt which becomes a tax burden... or we simply increase our national debt to an even larger, staggering amount to continue spending more than we earn.
2. they don't like U.S. government backed notes (maybe getting too risky), but find that U.S. land is a great bargain so they buy land and property... which is okay because now they are taxpayers... while driving up the cost of property so that U.S. citizens have a harder time owning property (talk to New Yorkers)... renting is good.
   
3. they don't like the either U.S. government backed notes (too much national debt?) and they don't find the U.S. a great place to start a business (labor costs too high), so they try to exchange their dollars for Euros... driving down the value of the dollar... making U.S. products more attractive versus some imports... but still not competitive with the cheap-labor producers... and making heavily imported items such as oil more expensive resulting in higher inflation, higher interest rates by the Fed, and greater costs to businesses which must be covered by raising prices... keeping the U.S. products non-competitve... and U.S. citizens relatively worse off (fewer high paying jobs and increasing cost of goods... remember all of those U.S. industries that have gone under or are struggling to compete with the cheap labor countries).
   

Okay, the sky isn't falling... yet. The negative current account is still only 5% of the GNP. But the dollar has fallen quite a bit in the past 2 years. Oil has risen (and, yes, a lot of that has to do with China who is now becoming our chief competitor by undercutting domestic producers by refusing to let their currency float) and is spurring inflation (despite government insistence that it isn't) and is sure to affect the vast travel and tourist business segments negatively. And unemployment still remains way too high in traditional manufacturing areas... but is not too bad in the fast food sector with so many more available workers.

Oh, it's all supposed to work out. GM will be rich because of what they make in China. Maybe. But GM is not doing all that well financially despite dreams of glory in the Chinese marketplace. And then there is the Chery... go ahead and Google that one.