Real GDP growth
Other issues could play into this. The US is currently running large defecits in their current accounts--ie. they are buying more things from abroad than they ares selling abroad. This is currently being offset by investors willing to invest in Treasury bonds, which are roughly 5% for the 10 year bond; and in American assets such as the stock market. This means that foreigners are buying more of the US debt, and more of American companies, than they have in the past. And over the last 15 months the dollar has strengthened from 74 cents to the Euro to 82 cents today--though that shows a slight slippage from 84 cents over the several months.
So the argument is certainly not overwhelming that there will be a downfall of the dollar, and in fact I would suggest there is a pretty strong argument that investors will continue to choose to invest in the US, and in effect, support the dollar. While their may be some imbalances, they may be corrected by the normal swings in exchange rates--Euro's versus dollars versus the yen versus other currencies. There is also a reasonably strong financial reason for countries trading with the US to want to maintain a strong dollar. The US current account deficit means that the US is buying a significant amount of manufactured goods from overseas. A lowering of the value of the dollar would make foreign goods appear more expensive to American buyers, who would likely respond by cutting back on foreign goods and buying more American produced goods, and by cutting back on their spending habits in general. (And of course it would make American exported goods look much cheaper to overseas customers). This would have the desired effect of correcting the current account balance,,,,but likely for many countries would lower demand for their products, with all of the side effects that follow from that--certainly recessions in certain countries could result, including the US, and perhaps a global recession.
By contrast, although Europe has its problems the accession states will provide scope for a lot of future growth and employment, as well as prompting a realignment of old Europe industries toward more competitive footings. And the grey economy is much bigger.
The OECD statistics don't capture reality fully. An economist looks at the market in practice and wonders whether it works in theory.
None of the sectors is actually "productive" in terms of future earnings potential and international competitiveness.
S&P 500 Industry weightings How various industries were represented in the S&P 500 as of Jan. 22: Financials 18.2% Information technology 18.2% Health care 14.4% Consumer discretionary 12.9% Industrials 10.9% Consumer staples 8.4% Energy 6.1% Telecommunications 5.3% Utilities 3.1% Materials 2.5% Source: Standard & Poors
How various industries were represented in the S&P 500 as of Jan. 22:
Financials 18.2% Information technology 18.2% Health care 14.4% Consumer discretionary 12.9% Industrials 10.9% Consumer staples 8.4% Energy 6.1% Telecommunications 5.3% Utilities 3.1% Materials 2.5%
Source: Standard & Poors
I do think European companies will do well because they are also global in nature, as will Asian non-Japan companies. Right now investors believe US companies will do better, as reflected by the 17 P/E ratios in America versus the 13.5 P/E ratios in Europe (I would have to dig to pull that out, but I saw it in the last few days--sure I could find it with a little more tiime). The higher P/E reflects investor expectations that those companies wil grow faster than lower P/E companies.
However, and here I am very much the contrarian on this site, I expect the overall GDP growth rates (not addressing equity issues with these comments) to remain higher in the US than the EU. The EU has made political, social and economic choices that have limited their GDP growth over the timeframe shown by the OECD graphs, and that has continued in 2005 and early 2006. This is not meant to be a criticism of those choices made by the EU. Clearly there are lifestyle benefits enjoyed by Europeans that they value when they make these choices, and I think it's illogical for people outside those societies to criticise choices made by people in free democratic societies. But choices involve tradeoffs, and policies that have led to a broader social net and more equality among income classes, IMHO, have also led to lower GDP growth and higher unemployment. But it's not just coincidence that these numbers have been so consistent over the last 15 years, and the policies are not changing, so I don't expect the numbers to change.
IMO two western industries will do especially well, and I mentioned this in an earlier post. Those industries were information technology and health care (where I used medical devices as the example, and specifically the endovascular segment of this industry). Demographics in Western countries and increasing wealth in developing countries will lead to rapid growth in healthcare, and many life savings products and technologies. The technology base in healthcare is incredible right now to support new innovation, with gene structure information available and many new tools available to exploit that data base. Minimally innvasive technology forms a wonderful base for miniaturized chips and "machines" to be placed in the body for diagnostic and therapeutic purposes. In technololgy, there is the same type of opportunity in the sense of a wonderful existing base of technologies, tremendous opportunities to improve productivity in general industries by using these new technologyies, which is a key driver of improving GDP per capita. Asia is heavily involved both as a consumer and a producer. Both technology and healthcare are truely world wide markets.
In technololgy, there is the same type of opportunity in the sense of a wonderful existing base of technologies, tremendous opportunities to improve productivity in general industries by using these new technologyies, which is a key driver of improving GDP per capita. Asia is heavily involved both as a consumer and a producer. Both technology and healthcare are truely world wide markets.
In the long run, we're all dead. John Maynard Keynes
Americans will sell their investments to cover their retirement and other spending. American companies, many of whom already receive half or more of their profits from doing business outside the US, will be bought be "foreign" investors, and thus have much more foreign ownership. Treasury bills will also continue to be bought by foreign investors, as long as the government has a plan to manage the annual deficit--which it does and it's laid out in the long term US budget projections--, the plan seems doable, and the plan is basically achieved over the years. Investors will simply not ignore the fact that the debt/GDP ratio for EU members is significantly higher than the US. If the US falters on its long term budget projections---well, that's a different story, and investors, such as me, will move more and more of our investments to the EU and Asia. But my view today is that capital account surpluses in the US will have no problem covering current account deficits--and what's wrong if the US simply maintains a ratio of Debt/GDP that is lower than the EU (and that means a lot more borrowing due to GDP growth), and what's wrong if these American companies that are so global anyway are owned more and more by people outside of America. This trend will not go on forever, but it will for quite a while.
Thoughts?
As to the current account deficit, I'll don't think I can add to how I responded to Jerome.
