OT: Clinton's Promise Regarding the IMF has been Broken: Trade Deficit Defies an Earlier Clinton Administration Statement

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The results of trade statistics for the month of May have revealed an all-time US trade record trade deficit Trade Deficit Hits Record In May. Why does the US have a steeply-climbing trade deficit? Yahoo, of course, cites a "strong US economy and record imports". Yahoo's analysis is shallow at best. Just how much has the trade deficit risen over the past year? What has the Clinton/Gore administration done to help lower the trade deficit? One thing that the media outlets seem to have very conveniently forgotten is certain statements made by a certain man in Washington who was trying to muster support for funding the IMF.

On July 17, 1998 Yahoo News published the following (bolding added): **********************************************************************

Friday July 17 2:13 PM EDT Clinton: IMF funding critical for Asia, trade WASHINGTON (Reuters) - President Clinton said Friday that U.S. funding for the International Monetary Fund was vital for economic recovery in Asia and for reducing the vast U.S. trade deficit.

"We are not making the exports, especially to Asia, that we would otherwise be making if those economies were coming back, and a critical part of that is our contribution to the International Monetary Fund," he told reporters.

"We should make our proper contribution to the International Monetary Fund to promote economic reform and economic recovery in Asia, and the fact that we have not done so is endangering the livelihood of American farmers and American factory workers," he added.

The White House has asked Congress to contribute $18 billion to top up the IMF's depleted funds. The Senate has approved this but the House of Representatives has not. A key House subcommittee has agreed to give $3.4 billion.

Clinton said the increase in the U.S. trade deficit, which hit a record high of $15.75 billion in May, was almost entirely due to the Asian financial crisis, which has made Asian goods cheap for Americans and U.S. goods expensive for Asians.

"There is a disciplined answer. We need to restore growth in Japan, restore growth in Asia, and our major goal here should be to pay our fair share to the International Monetary Fund so we can support economic recovery so they can afford to buy our products," he added.

Earlier Related Stories  IMF funding gains momentum in U.S. Congress - Thu Jul 16 7:31 pm **************************************************************************

In October of 1998 the US House of Representatives approved the $15.75 billion for the International Monetary Fund. A large part of these funds have been disbursed. In May of 1999 the US trade deficit hit an all-time record high of $21.34 billion: a 35% increase in one year. In July of 1999 IMF leaders say they want to sell up to 10 million ounces of gold to replenish their coffers again IMF Discusses Gold Sales As Opposition Grows. The same US Congress that gave $15.75 billion to the IMF is being asked to vote to sell IMF gold at record-low prices. Meanwhile Bill Clinton wants to allow China into the World Trade Organization, and the American farmers and American factory workers are still waiting for the great turnaround in the imbalance of trade.

-- Rick (rick7@postmark.net), July 21, 1999


All of the east Asian nations use some variation of the strategy developed by Japan and South Korea, of exporting as much as possible to the USA and protecting domestic industries from import competition. The USA encouraged this strategy because of the Cold War. Strong economies in Japan and South Korea kept them solidly in the non-communist bloc. After a couple of decades we grew addicted to cheap imports as a way of offsetting inflation.

Now that all of east Asia is in recession or depression, the main IMF strategy is more of the same, coupled with moderate pressure to reduce corruption and cronyism. Essentially, the USA is the only market in the world that is absorbing the world's excess factory capacity. The east Asian nations are exporting their depression to us. We just haven't caught the full impact, yet, because we have been buffered by the boom in US financial paper: stocks and bonds.

As our dollar buys more and our stocks go up, we all feel wealthier. But it is an illusion that may burst sometime soon. The whole IMF/Treasury/Federal reserve gamble is that east Asia can recover *before* our bubble bursts. It can't. It won't. The reason is that east Asia factory capacity is grossly overbuilt. The foreign debt that they took on to build the factories is far less flexible than the prices of their products. The excess capacity and weak global demand pushes prices down faster than their export earnings can repay the loans. They are trying to run up a down-moving escalator.

The Federal Reserve was sympathetic to the needs of east Asian nations, because it saw that the damage in Asia would return to the USA in the form of huge losses to US investors, weakening our economy. They were especially worried by the weakness in Japanese banks, who had a loaned a lot of yen into other east Asian nations. They backed the IMF loans in 1997 as a way of popping up the Japanese banks.

When Russia defaulted in 1998 and our stock market lost almost 20% of its value last September, the Fed acted again. As part of a coordinated movement to contain the damage, the Fed acted to increase demand for Asian imports in the USA by stimulating the money supply. They did this by lowering interest rates rather than by monetizing debt and weakening the dollar.

It worked, more or less. Demand for imports is way up. The bad news is that US consumer credit and personal bankruptcies are at dangerous levels, our savings rate has been negative for several months, and the stock market has bubbled up to insane heights.

I guess what I'm trying to say is that Clinton is scarcely a player in all this. He was just taking the advice of Rubin and Greenspan. All the real players knew our trade deficit was headed for the sky. That was the *plan* for heaven's sake! But they had no way ahead of time to calculate the true cost of their plan, or if it would work as hoped. They just held their noses and dived over the cliff.

It's clear now that the plan has about a chance in a hundred of squeaking us through. All it did was keep the wolf from the door for another year. Meanwhile, the wolf has gotten meaner.

Global overcapacity is close to 30% in most industries. When the less-efficient ones finally close their doors, a lot of people will be out of work, a lot of banks and a lot of investors who owned them will be poorer, and their poverty will drag down aggregate demand for many years to come, putting even more pressure on the remaining producers to find markets where they can sell enough to keep their doors open. This was the Great Depression in a nutshell.

The real solution will come when overseas factory workers are paid enough to consume what they make. As long as it's a race to the bottom, our best hope is to raise the floor as high as we can.

-- Brian McLaughlin (brianm@ims.com), July 21, 1999.

Thanks for a really thoughtful reply Brian.

-- Rick (rick7@postmark.net), July 21, 1999.

Mr. McLaughlin has had a number of stellar posts in recent days. This one is as succinct and correct an explanation of our SE Asian economic policy as I have ever seen.

-- Don Florence (dflorence@zianet.com), July 21, 1999.

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