See you in 2011 June, can't wait

"...now that the White House is open to alternatives to pricing carbon. "

Perhaps there's a shift in the way we're thinking about pricing carbon-

http://www.politico.com/news/stories/0610/38599.html

Maybe they saw the polls showing Americans prefer incentives to caps-

http://www.slideshare.net/Revkin/six-americas-study-of-climate-views

Research Note

News just came out that April was the largest U.S. trade deficit in almost a year and a half, putting the U.S. on pace for another $500 billion deficit like 2009. The current account deficit was larger still in 2008 at some $700 billion. There is nothing inherently wrong with deficits, so long as they can be financed with GDP growth. However, if they continue to increase, it could undermine international confidence as doubts linger about the seriousness of long-term U.S. fiscal and trade policy, or drive uncertainty around whether there is high currency risk via the U.S. monetizing the debt by printing money, reducing creditor's purchasing power. Add to the fact that as China grows in prominence over the coming decades, U.S. denominated assets and debt obligations may become less in demand. China will in all likelihood surpass Japan in 2010 as the second largest national economy and is on pace to surpass the United States by mid-century. The U.S. dollar may become the secondary currency for international trade in the long-term. In the short term though, correcting this imbalance could be achieved through the double prong strategies of reducing the fiscal deficit and promoting U.S. exports, thus creating jobs and reducing the need for foreign savings.

The current account deficit is a rough measure of U.S. economic competitiveness relative to the global economy. It is the difference between national saving and national investment, or the net of foreign reserves entering the U.S. economy and U.S. dollars going out. The U.S. buys more (dollars out) than it sells abroad (reserves in), financed mainly by foreign purchases of our debt. The biggest factor in this imbalance is the mutual dependence between the U.S. and China. China depends on U.S. demand for export growth, the largest driver of their GDP growth, while the U.S. depends on China to buy and roll over our debt, used in large part to buy their exports. Each needs the other, and so it is both an unsustainable, and self-perpetuating, cycle. Here are three things the U.S. should do to lower this balance and increase foreign demand:

1) Biggest long term priority should be innovating new products and exporting this trade advantage to the world. This would lead to some dollar appreciation, but the increased demand would create sustainable jobs and generate reserves. The biggest market here, both in terms of marginal return on investment and depth of demand globally, is clean energy technology and services. A domestic price signal on carbon would catalyze the U.S. economy to leap ahead in this area and close the trade imbalance as we export smart energy applications, concentrated solar, consulting services, wind turbines and other carbon neutral or carbon negative technologies abroad. The U.S. could get ahead of the curve by adopting this price signal before other countries.

2) In the shorter term, bring the fiscal deficit down.

3) Continue to make progress with the U.S.-China Strategic Dialogues, nudging China to stop suppressing their currency to promote U.S. demand, and to create a stronger domestic credit environment and social safety net to prevent cash hording and exorbitant savings. Freeing up Chinese savings for consumption would help decrease the net trade imbalance between the two economies.