America s Assets and Liabilities in the Global Economy Presentation to 2014 Global Economic Forum July 1, 2014 Mark A. Wynne Vice President &

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1 America s Assets and Liabilities in the Global Economy Presentation to 214 Global Economic Forum July 1, 214 Mark A. Wynne Vice President & Associate Director of Research for International Economics Director, Globalization & Monetary Policy Institute Federal Reserve Bank of Dallas

2 Overview The importance of globalization Financial globalization and the indebtedness of the United States Is the United States different? Concluding observations

3 The world has changed Percent of world GDP Emerging Advanced In 213, for the first time in recorded history, more economic activity took place in the so called Emerging Market economies than in the Advanced Economies

4 and will change further 3 25 Percent of world GDP China U.S. Based on current trends, China s economy will overtake that of the United States (in size) some time in the next five years

5 Global capital flows Tril. U.S. dollars All other countries OPEC Spain U.K. U.S. Other European countries China Japan Germany

6 U.S. borrowing from the rest of the world Percent of U.S. GDP Financial globalization began with the dismantling of the Bretton Woods system of fixed exchange rates in the early 197s, after which the U.S. began to borrow heavily from the rest of the world

7 U.S. borrowing from the rest of the world Percent of U.S. GDP Current account 6 Consumption plus residential investment Percent of U.S. GDP

8 Party time! Percent of U.S. GDP Current account Consumption plus residential investment Percent of U.S. GDP

9 The world has also changed for central bankers Percent U.K. Euro area U.S. Japan The world economy has been in a global liquidity trap since the financial crisis of Note: With the introduction of quantitative and qualitative monetary easing by the Bank of Japan on April 4, 213, the main operating target for money market operations changed from the uncollateralized overnight call rate to the monetary base. The average rate is plotted for Japan starting April 4, 213.

10 Federal Reserve s Balance Sheet Currency Swaps Other loans (AIG) Tril. U.S. dollars Bear Stearns Facility Money Market Investor Funding Facility Primary Dealer Credit Facility Commercial Paper Funding Facility Term Auction Facility Other.5 Discount Securities/Repos

11 The Great Depression and the Great Recession 11 1 U.S. industrial production 27 = 1 Index, peak = U.S. industrial production 1929 =

12 The Great Depression and the Great Recession U.S. real GDP 27 = 1 Index, peak = U.S. real GDP 1929 =

13 The Great Depression and the Great Recession 25 2 U.S. unemployment rate Percent U.S. unemployment rate

14 The Great Depression and the Great Recession 11 1 World industrial output 27 = 1 Index, peak = World industrial output 1929 =

15 From being a net creditor to net debtor 15 Percent of U.S. GDP : The tipping point

16 Is the U.S. different? Role of the U.S. dollar as a global currency As vehicle for holding foreign exchange reserves As a unit of account for pricing (e.g. oil, airplanes) Seigniorage revenue About half of US currency held outside the United States Ability to issue debt in our own currency US almost uniquely privileged in this regard Safe haven status

17 Foreign holdings of U.S. Treasury debt As a percent of total U.S. Treasury debt outstanding

18 Foreign official institutions holdings of U.S. Treasury securities As a percent of total foreign holdings of U.S. Treasuries

19 U.S. dollar the preferred vehicle for holding foreign exchange reserves Percent of global foreign exchange reserves Launch of the euro as an accounting currency on January 1, 1999 made very little difference to the share of global foreign exchange reserves denominated in dollars. Likewise, the introduction of euro notes and coins on January 1, 22 made very little difference to the importance of the dollar in foreign exchange holdings U.S. dollar share of foreign exchange reserves

20 A tidy source of profit to the U.S. taxpayer Percent of U.S. currency held overseas

21 Currency Composition of U.S. International Assets Share (percent) Other Singapore Mexico Brazil Australia Switzerland Japan Canada U.K. Euro area U.S.

22 Currency Composition of U.S. International Liabilities Share (percent) Other Sweden Australia Hong Kong Mexico Canada Switzerland Japan U.K. Euro area U.S.

23 Total FDI in the U.S. and abroad Tril. U.S. dollars U.S. direct investment abroad FDI in the U.S

24 Composition of foreign direct investment in the U.S. Share (percent) Africa Middle East Latin America Canada Asia and Pacific Europe

25 Composition of U.S. direct investment abroad Share (percent) Africa Middle East Canada Asia and Pacific Latin America Europe

26 The external value of the dollar Other important trade partners Majors Trade weighted value of the dollar Index, Jan = Appreciation of the dollar due to safe haven capital flows during the financial crisis

27 Final thoughts Globalization is driving a fundamental rebalancing of global economic activity Financial globalization has seen the U.S. go from being a net creditor to the rest of the world to being a net debtor Nevertheless, the U.S. is different in important respects A key challenge going forward will be to ensure that we do not squander that position

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