Global Imbalances and the U.S. Current Account Deficit. Economics 826 January 2009

Transcription

1 Global Imbalances and the U.S. Current Account Deficit Economics 826 January

2 A. What are the facts? B. Why is this trend worrying? C. What are the possible causes? D. What are the possible adjustments? E. What effect has the financial crisis had? 2

3 A. What are the facts? The US deficits are persistent and large in dollars. They are not unusually large as a percentage of GDP (at least by the standards of other countries). They are unusually large as a percentage of US exports. US net foreign debt now is roughly 20% of GDP. 3

4 The US CA deficit in billions of current dollars:

5 For the rest of the advanced economies the balance in 2007 was $362 billion. Within this subtotal $220 billion was due to Japan and $106 due to the newly industrialized Asian economies. 5

6 For emerging and developing economies the current account balance was $634.2 billion The world current account balance was $265.3 billion, due to well-known problems of measurement. 6

7 China s current account surplus was $372 billion. Notice that its surplus in 2007 was roughly 50% 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.) 7

8 Until recently then, there seemed to be 4 groups of countries: 1. fast-growing advanced economies in deficit 2. slow-growing advanced economies in surplus 3. oil-exporting economies in surplus 4. emerging Asia in surplus 8

9 What about percentages of GDP? In 2008 the US current account balance is projected to be -4.6% of GDP. The corresponding figures for other countries were: Japan 4.0, UK -3.6, Australia -4.9, Norway 19.1, HKSAR 11.7, Singapore Numerous other countries had balances of ±5% of GDP. 9

10 Now, US GDP is about 20% of world GDP. Therefore, its current account deficit of roughly 5% of its GDP is about 1% of world GDP, or about 4% of world savings. The source for these tables is the International Monetary Fund s World Economic Outlook, October 2008 and the CIA world fact book. 10

11 B. Why is this trend worrying? US national wealth = capital stock + NFA... but until recently the capital stock was rising faster than NFA was falling. A large negative value for NFA leads to high interest costs... but until recently net interest receipts were positive (remember dark matter ) There may be a difficult adjustment (see D. below) 11

12 C. What are the possible causes? First, here are some saving and investment shares for 2007: Saving Investment World US Japan Canada Euro NIAEs EDEs

13 Comparing these shares over time or across countries suggests the cause is not a US investment boom. I/Y is not unusually high in the US. World real interest rates have fallen in the last decade. So we probably do not need to look to US productivity growth as a cause. Also, foreign investment in the US is mostly portfolio investment not FDI. 13

14 That leaves low US saving, low foreign investment, and high foreign saving to check on... Second, then, look at exogenous influences: Low US savings may be partly due to bursts of government spending. 14

15 Theory predicts that changes in the share of government spending on goods and services will lead to changes in the current account. The effect depends on (a) the persistence of the changes and (b) the size of the economy. Do you think that this share can explain the U.S. current account deficit? 15

16 Remember also that government saving (the budget deficit or surplus) may separately affect national saving, in the absence of Ricardian equivalence. Here are general government fiscal balances for 2007, as percentages of GDP: US -3.7 Japan -5.6 Euro -2.2 UK -3.3 Canada 1.7 It is hard to see a twin-deficit correlation across countries (e.g. Japan, Germany) or over time for the US. 16

17 What methods could we use to assess (a) the relative roles of various factors in explaining the deficit?; and (b) whether it can be explained at all using standard models? Remember we need to explain both time series and cross-section dimensions. 17

18 D. What are the possible adjustments? How will the sequence of US current account deficits come to an end? (a) there may be a US nominal depreciation (to bring about a real depreciation). 18

19 Economists lack consensus on the scale or suddenness. Some predict a sudden withdrawal of foreign investment and a fall in the value of the US dollar, as happens in emerging economies. (b) For future reference: the real exchange rate also could adjust through inflation differences across countries. (c) Valuation changes (including those due to the exchange rate) also could be part of the adjustment. 19

20 (d) protectionism (d) oil price fall (e) no adjustment may be needed if China continues to buy USD to keep the value of the RMB low. 20

21 E. What effect has the financial crisis had? (a) the strong US dollar has slowed adjustment... (b) as has the further fall in US government saving (c) but US private saving may increase (equivalently slower growth may reduce import demand). 21