Worst Current Account Deficit since 1955
Posted by jdavis on December 10, 2014
Why 1955? Because that is when records began.
What is the current account deficit?
Simply put, it's the shortfall of exports over imports. We're importing more than we're exporting. (But they told us manufacturing is doing well. Well, it's not doing badly but we're buying stuff from abroad even more so.)
Well, that's good isn't it. If we can afford it what's the problem?
- We can't afford it. We are borrowing previously unimagined amounts of money.
- If we're not making it someone else is. They get stronger while we get weaker.
- An economy was never sustainable buying and selling houses on more and more debt.
This isn't just bad. It is absolutely dreadful. We haven't exported more than imported since 30+ years ago - not counting very brief periods in the 90s.
Why does it matter to you if you're not in manufacturing?
As UK based investors if our currency goes down you will find you are missing out if heavily invested in UK assets. Normally, too, a currency crisis will be inflationary. Your investents need to be structured so that they meet the inflationary challenge.
A Current Account Deficit has ALWAYS previously preceded a currency crisis? Look at Russia. Selling less oil has driven their currency down down down. If our currency has a major fall, this could be a trigger for much higher interest rates - as has happened frequently in the past. [Actually, we do not expect this given the very low inflation that we have, as well as the All Time Lows on Gilt Yields.]
However, in any case, a falling currency would make imports more expensive and drive up the costs of living by, for example, raising our petrol, heating and lighting costs.
Irrespective of all that, buying in more than we sell is obviously not good. One day governments will realise this.