`Global Imbalances and the US Current Account Deficit. Economics 426 January 2016

Transcription

1 1 `Global Imbalances and the US Current Account Deficit Economics 426 January 2016

2 2 A. Thoughts on Capital Flows Courtesy of David Backus, NYU

3 Thoughts Capital Flows: Thoughts Backus (NYU) Capital Flows & Demography 2 / 35

4 Thoughts Thoughts about capital flows Michael Bordo, Globalization in historical perspective, 2002 The fifty years before World War I saw massive flows of capital from Western Europe to (mainly) the Americas and Australasia. At its peak, the outflow from Britain reached nine percent of GNP and was almost as high in France, Germany, and the Netherlands. Private capital moved essentially without restriction... into bonds that financed railroads and other infrastructure and into government debt. Link: Backus (NYU) Capital Flows & Demography 3 / 35

5 Thoughts Thoughts about capital flows Lars Jonung, Sweden under the gold standard, 1984 In the second half of the nineteenth century, Sweden began a process of industrialization financed by considerable capital imports which transformed a basically agrarian country into an industrialized society. From Bordo & Schwartz, Retrospective on the Gold Standard Backus (NYU) Capital Flows & Demography 4 / 35

6 Thoughts Thoughts about capital flows CA/GDP AUS CAN DEU SWE GBR USA Source: Jones and Obstfeld Backus (NYU) Capital Flows & Demography 5 / 35

7 Thoughts Thoughts about capital flows Michael Bordo, Globalization in historical perspective, 2002 A striking feature is the size and persistence of current account deficits in this period, esp in Australia, Canada, Argentina, and the Nordic countries, as well as the surpluses of the UK and France. This globalization of finance had its dark side in periodic crises when capital flows abruptly reversed themselves. Link: Backus (NYU) Capital Flows & Demography 6 / 35

8 Thoughts Thoughts about capital flows John Maynard Keynes, I disagree most strongly that the control of capital movements may be unnecessary.... I see no reason to feel confidence that the more stable conditions [of the post-war era] will remove the more dangerous movements [of capital]. Central control of capital movements, both inward and outward, should be a permanent feature of the post-war system. Quoted by Crotty, JEL, 1983 Backus (NYU) Capital Flows & Demography 7 / 35

9 Thoughts Thoughts about capital flows Daniel Gross, New York Times, May 8, 2005 [US] imbalances are eerily reminiscent of recent economic crises. Could we see a perfect storm [for the US economy]? If so, what would it look like? Nouriel Roubini estimates that long-term interest rates in the US could rise sharply and the dollar fall. Jeffrey Frankel adds: some of us have been warning of this hard-landing scenario for more than 20 years. Backus (NYU) Capital Flows & Demography 8 / 35

10 Thoughts Thoughts about capital flows Group of 20, Communique, April 15-16, 2011 We agreed on a set of indicative guidelines... to address persistently large imbalances. We now launch... an in-depth assessment of the nature of these imbalances and the root causes of impediments to adjustment.... We will ascertain for our next meeting the corrective and preventive measures. Øystein Olsen, Norges Bank, March 2011 Global trade imbalances have been reduced somewhat over the past two years, but there is a considerable risk that they will persist. They must be corrected. Backus (NYU) Capital Flows & Demography 9 / 35

11 Thoughts Thoughts about capital flows Dick Caves and Ron Jones, World Trade and Payments, 1973 By accounting rule, credits (or receipts) make the balance positive or favorable. Debits are unfavorable. Notice the gravitational pull of semantics! The receipts side owns all the good words, and has done so since the eighteenth-century mercantilists made a virtue of storing up treasure. (first edition, page 87, lightly edited) Backus (NYU) Capital Flows & Demography 10 / 35

12 Thoughts Thoughts: summary Long history of ambivalence over capital flows Facilitator of economic growth? Or source of instability? Suggestion: don t let the words decide Find and replace: global imbalances international capital flows Our focus Where do capital flows come from? Why are they so persistent? Backus (NYU) Capital Flows & Demography 11 / 35

13 3 B. What are the facts? US current-account deficits are persistent and large in dollars. US net foreign debt is now roughly 20% of GDP. These deficits are not unusually large as a percentage of GDP (at least by the standards of other countries.) Tables in The Economist give current account balances as a percentage of GDP.

14 4 The world has a current account surplus, due to problems of measurement. China s current account surplus is roughly 60% as large as the US current account deficit. (But also notice that China s bilateral surplus with the US is somewhat larger than this, for it has a current account deficit with some other countries.)

15 5 US GDP is about 20% of world GDP. Its current account deficit of 2.5% of its GDP is about 0.5% of world GDP or 2% of world savings. See the IMF s World Economic Outlook for updates twice each year. The US CA deficit has recently trended down as has China s CA surplus. So perhaps global imbalances are going away.

16 6 C. Why is this trend worrying? US national wealth = capital stock + NFA 1. Until recently the capital stock was growing faster than NFA was falling. 2. A large negative NFA leads to high interest costs... but remember net interest receipts were/are positive. 3. There may be a difficult adjustment (see E below).

17 7 D. What are the possible causes? Saving and investment shares of GDP vary a lot by country. But I/Y is not unusually high in the US, which suggests the cause is not a US investment boom. So we probably do not need to look to US productivity growth as a cause.

18 8 Also foreign investment in the US is mostly portfolio investment not FDI. That leaves low US saving, low foreign investment, and high foreign saving to check on. Low US saving could be due to bursts of government spending. In theory, this effect depends on (a) the persistence of the changes in government spending and (b) the size of the economy. Do you think that G/Y can explain the US current-account deficit?

19 9 Next, if Ricardian Equivalence does not hold, then government saving (the budget deficit or surplus) may separately affect national saving. But it is difficult to see a twin-deficit correlation either in the US time series or in the international panel of countries. How could we assess the relative roles of various factors and whether we can explain the CA deficit at all?

20 10 E. What are the possible adjustments? How will the sequence of US current account deficits come to an end? (a) There may be a nominal depreciation and real depreciation, which improves the US trade balance. (b) The real exchange rate also could adjust through inflation differences across countries. More on this later in the course.

21 11 (c) There could be an increase in protectionism in the US, though it is unclear how effective that would be. (d) Continued low oil prices or China s exchange-rate policy (discussed later in section 5) may delay adjustment.

22 12 F. Did Imbalances cause the Financial Crisis? FT 11.4 have an excellent discussion. Here is the logic: 1. The 1990s Asian Crisis prompted self-insurance by EM governments, especially in China: large holdings of foreign assets. (They saw what occurred in South Korea and Indonesia.) 2. Much research asks why China s savings rate is so high.

23 13 3. This capital inflow ( savings glut ) into DMs led to a quest for yield. 4. Combined with (a) irrationality of investors, (b) poor regulation/supervision, (c) implicit subsidies to banks, this led to very poor investments especially in housing.

24 14 G. Did the crisis lead to some correction? The strong USD slowed adjustment early in the crisis. So did a further fall is US government saving (large budget deficits) perhaps. But US private saving has increased (equivalently, slower growth seems to reduce import demand) so that trend may eliminate the CA deficit.