money good 88.
(photo credit: )
We continue to remain true to the slogan of "follow the money" - the late Deep Throat's advice for resolving who was behind the Watergate break-in - as the formula to help understand what is happening in global financial markets. In particular, how does the US manage to run a massive and ever-growing current account deficit without the dollar collapsing and the roof falling in on the American economy?
As an aside, it's worth calling attention to an article in Thursday's Financial Times, by Ricardo Hausman and Federico Sturzenegger in which they offer a novel explanation for why almost 30 years of accumulating current account deficits has not done in the American economy. Their bottom line is that the accepted way of measuring current account surpluses and deficits is wrong and that, in practice, there is no US current account deficit. These are very serious and respected economists and what they have to say requires careful consideration, despite - or maybe just because - it is way off the beaten track.
But for immediate purposes, let's keep things simple and stick with the standard data about current account balances, as presented in the IMF's World Outlook dated September 2005. My thanks to Saul Eslake, chief economist of ANZ Banking Group in Australia, for drawing attention to a major change in the global pattern of surpluses and deficits and the implications thereof.
What Eslake shows via the IMF data is that the 'old' story, from 2003-2004, of Asian countries (primarily Japan and 'Greater China' - i.e. China + Hong Kong + Taiwan) rapidly accumulating huge current account surpluses, is now passe. The aggregate Asian surpluses will still be very large this year - around $300 billion - but less than last year. For 2006, the IMF expects this trend to continue.
The other part of the old story is still in place: the US current account deficit continues to swell from year-to-year, and is expected to continue to do so. But elsewhere, there have been important developments. Firstly, the EU has swung from a position of small surpluses in 2002 to 2004 to a small deficit this year, growing somewhat next year but all in the low tens of billions. The absolute amounts are not dramatic, but the trend is important and gives a clue as to what is happening at the global level.
Whilst Europe swings from surplus to deficit, Latin America is moving in the other direction. In fact, that region's swing began in the wake of the collapse of Argentina in late 2001. The overall regional deficit shrank in 2002 and swung into surplus the following year. The surplus grew in 2004 and again this year, although the IMF reckons it will shrink somewhat next year. But this is still small beer on a global scale.
The big changes have been in two areas. One is the Middle East, where the small and declining levels of surplus that characterized 2000-2003 have given way to a $100 billion surplus in 2004 and an estimated $200b. to 300b. in 2005-2006. The second is Russia, where the small surpluses achieved in the post-crisis years of 1999-2003 gave way to a $50b. surplus in 2004, rising to over $100b. this year and an estimated $125b. or so next year.
Now a short quiz: 1. What common factor links the current accounts of the Middle East and Russia? 2. What major development in the global economy since 2003 has had major positive implications for the Middle East and Russia? If you answered anything other than oil exports and oil prices, you flunked.
So oil is now the key driver in determining which countries and regions are raking it in and which are shelling out. That is simple enough. If we add this week's news item that Mr. Zawahiri, Osama's number two, is directing al Qaeda to attack oil installations in Muslim countries, can you guess which direction oil prices are likely to go next year, and who do you think will be the winners and losers from those developments?