Today the media focused its attention on the .3% decline in August retail sales, while ignoring the far more significant piece of economic data that the second quarter of 2004 produced another record current account deficit of $166.2 billion. This lack of media attention is nothing new, and in fact highlights just how little interest or understanding those reporting on the economy have in this all-important statistic.
The current account is the single most significant measure of the economic performance of a nation, and is the national equivalent of a corporation’s profit and loss statement. If the U.S.A. were a corporation, today’s current account may have been reported in the following manner:
“Today, U.S.A. Inc. posted a record second quarter loss of 166.2 billion, exceeding estimates by 6.4 billion. The loss, which increased 20% sequentially and 24% year over year, represents the 88th consecutive quarterly loss for U.S.A. Inc., which hasn’t posted a profit since the second quarter of 1982. Analysts are revising upwards their estimates for future losses.???
Based on this kind of performance, why would anyone want to buy stock in U.S.A. Inc?
The closest thing to the equivalent of shares in U.S.A, Inc, the U.S. dollar, did indeed fall in response to the release of this greater than expected quarterly loss, though the decline was minimal compared to what would have happened to shares of an actual corporation that posted similar results. In fact, former Federal Reserve chairman Paul Volcker recently stated that he believes there is a 75% probability that the dollar will fall sharply over the next five years. This equates to an all-star analysts at a top investment bank putting a sell recommendation on shares of U.S.A., Inc., or Jack Welch telling you to sell G.E.
Put another way, Volcker believe that there is only a 25% probability that the U.S. dollar will not collapse during the next five years. If you like those odds, then keep holding your dollar denominated assets. If you don’t, get out while there is still an ample supply of fools who do.