The US balance of trade slipped into negative territory in the 1970s, and the deficit has been on the increase ever since. The crisis slightly improved the situation, but it did not make a great difference. For decades, the US has spent more overseas than what foreign countries buy from it, the difference currently being USD 40 billion per month. That is indeed an amount—nearly a third of Hungary’s annual GDP.
The picture is improved somewhat by considering the current account balance. That is, by taking into account the balance of incomes, i.e. the surplus of the money earned by Americans overseas and taken home over the money earned by foreigners in the US. Basically, this does not make a difference either, the country has long run a deficit even in that scenario. Essentially, the main export of the US is the dollar, which it has been selling worldwide for all kinds of goods and materials. This raises two questions. First:
Why indeed does the US not run out of money if it only flows out of the country?
Because it does not only flow out. The money exported is typically returned by foreigners using their dollars to purchase US government securities. In effect, they re-lend the dough to the Yankee government, which will spend it and channel it back to the US economy. Of course, in time it will end up again overseas.
Another reason why money is not running out is that the Fed has been busy printing dollars for years, and the rain of dollars has stopped only recently. It would open up amazing perspectives to me if I could write a number on a piece of paper, sign it, and the best and most attractive and most valuable goods that can ever be produced would be brought to me from the world over, and sellers would undercut one another in bidding for my scraps of paper. After a while, I would take to what the US has been doing, and churn out those scraps without counting. There is nothing surprising about that.
Finally, fresh money can also be supplied through money creation by commercial banks, i.e. domestic lending. I would not go into details on that here; previously I have written about how it could lead to e.g. a savings crisis.
In summary, the US is not running out of dough because, on the one hand, foreigners are willing to re-lend the bucks received for their goods so that the US keeps buying from them. On the other hand, the US has been printing scraps of paper (so-called money), in exchange for which it receives goods from other countries. Well, neither process looks sustainable forever—stuff will hit the fan one day. Which raises the second question immediately:
Why indeed do foreigners accept the dollar, and why do they participate in unsustainable processes?
Behind it all is of course belief. While we believe that the dollar has a stable value, or at least that there is nothing better, we will go on accepting it. If America builds on this belief excessively and for too long, doubts will suddenly arise and the dollar will collapse. Of course, no one is there to tell how much is excessive and how long is too long—the status quo could be maintained for decades to come.
Otherwise, at the international level the same hypnosis is at play as I discussed in the previous part. Within the US, the rich are hoarding astounding stocks of cash like high-saving countries internationally. They are under the same hypnosis: the US currency has a stable value. Conversely, it is in fact more and more savings that pose a risk to the stability of value.
It is not impossible that soon the US will not depend on its dollar exports. Namely, the revolution of shale gas and shale oil could turn fossil imports into exports within a decade. That could bring the country’s current account close to equilibrium.
However it will turn out, an ideal monetary system cannot risk what the US has been doing. It is too dangerous to hoard such amounts of money, because if, for some reason, it is flushed on the economy all at the same time, it will cause inflation and turmoil. An ideal monetary system must be designed so that an integrated safeguard is in place to prevent such imbalances, and to manage them should they still arise. Such a mechanism has yet to be constructed.
Original date of Hungarian publication: 26 November 2014