Expert View: Spending all the way to the bank

At the moment everybody seems to hate the dollar. Perhaps that fits in with the popular image in Europe of the United States being to blame for everything. However, the usual explanation is the current account deficit, with the over-borrowed, spend-thrift, reckless American consumers relying on the kindness of strangers (i.e. the rest of us) to support their habit.

In fact, so widespread is this current account story that it has almost become an article of faith. That, of course, doesn't mean it is right. But before going up against conventional wisdom on economic matters, it is always useful to have a quote from Alan Greenspan to support your thesis. In a speech given in Washington last month, Mr Greenspan noted that for every current account deficit there is a capital account surplus (after all, that's why it's called the balance of payments). The question, then, is what comes first? Does the US every day spend $1.5bn dollars more than it earns and thus need to rely on others to lend it the money? Or does it receive $1.5bn a day from the rest of the world and need to spend it?

This is the economic equivalent of the chicken and egg question, and Mr Greenspan's point was that we can't really tell. While we haven't got an answer, we have at least properly defined the question. Rather than one false certainty, we now have three possibilities. Capital leads trade; trade leads capital; or both move simultaneously.

Let's therefore pretend for a moment that trade doesn't lead capital as is conventionally assumed. After all, if a current account deficit has always meant a falling dollar, then how come the US ran a substantial current account deficit between 1995 and 2002 and yet the dollar rose? Equally, if the US is so dependent on foreign central banks buying bonds to stop its interest rates going up - as the perma-bears suggest - then how come in September, when foreigners didn't buy many Treasury bonds, US bond yields fell sharply?

With this alternative view in mind, what do we think of the dollar and the US economy? First we would conclude that, far from the US consumer needing foreign savings, foreign producers need the US consumer. That would probably imply goods prices falling in the US as supply exceeded demand. Well, that's certainly happening. This is a huge challenge facing exporters to the US in 2004. With little demand at home, a reliance on America means huge pressure on margins. China, of course, is making this even worse. Its currency is pegged to the dollar, and its own rapid expansion is pushing up the price of commodities dramatically. Rising costs, falling revenues. Ouch.

Also, we might conclude that the majority of the world's savings have been stored in dollars because, just perhaps, that's where investors think they will get the best return. From direct investment to equities, from corporate bonds to government bonds, over the last decade the capital attracted into the US has found different homes. When rates of return start to balance, capital will flow out and goods will stop flowing in.

Here again we look at China. It has already attracted over $80bn of foreign direct investment, and in the past couple of weeks has seen some enormous stock issuance. China Life is raising $3bn and is said to be 10 times oversubscribed, while three more IPOs before the end of the year look to raise the same amount again. Capital is as capital does (as Forrest Gump would probably say). This suggests the US consumer is not a fool - and neither, for that matter, is the international investor. I can't prove it, but this view just seems to fit the facts a bit better.

Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@letsxstock.com