Another viewpoint: the problem is capital imbalance, not the trade deficit.

• Author: Rutledge, John

Another viewpoint: the problem is capital imbalance, not the trade deficit

Just as the U.S. in the late 1800s and Germany and Japan in the mid 1900s imported capital and industry for many years, so must the U.S. do this today if it is to fuel an economic revival. Fortunately, this revival will coincide with an aging U.S. population saving more and importing less, and foreign nations wishing us to "export" their capital back to them. The biggest problems facing the new administration are not the budget and trade deficits. Rather, the biggest problems are all those people in Congress, in editorial offices, and even in some corporate boardrooms who want to drive those deficits down as fast as possible. This is absolutely not what the U.S. economy needs right now.

At the heart of our problem is a severe capital shortage. Many people moan about budget deficits, trade deficits, etc., but those are really symptoms of a much more powerful change taking place in the capital accounts across the world. The companies that squander their capital find themselves selling for one-half of their book value and being climbed all over by raiders. The ones who learn how to manage their capital properly are the companies that are generating big multiples on asset values.

In fact, I think we're in the middle of what might end up being the second industrial revolution in the U.S. Who would have thought five years ago that the hottest story in 1988 would be Bethlehem Steel? Or that the hottest performing stock categories would include cement and textiles? This is not a deflation economy anymore. We're building some strong cash-generating companies out there.

So I'm very positive about the stock market, because today the business of buying and selling stocks is focusing on understanding management, not cost of capital. Cost of capital gave us a free ride between 1982 and 1986. Now you've got to know which managements are doing it and which ones are not.

Those who do not succeed at managing today are turning to protectionism. The U.S. attitude toward Korea is a good example of this trade-bashing as a substitute for management. I hear a lot of people saying, let's beat up on Korea. Korea's got this big surplus against the U.S.

To set the story straight, Korea had its first trade surplus in history in 1987. In every other year, they've run a trade deficit, and the sum of those trade deficits is all the money they borrowed from us in the past. That's the money we loaned them to build their economy. Now they owe us a lot of money, about $35 billion. So what...