To gain more understanding of the sources of saving and investment, we can disaggregate total saving into government (Sav G )

and then fell through 2013, from which the current account deficit has been relatively constant (2-2.3%). Since 1970, the most pervasive aspect of U.S. GNI shares is that growth has occurred predominantly in the consumption-services sector. Government deficits and current account deficit-led foreign investment have funded this growth. The domestic U.S. investment share of GNI has varied, and not grown. To further examine this issue, we examine the investment, savings, and current account components of GNI. Investment, Savings and the Current Account In the GNI accounts, savings is defined as all output that is not expended on private and government consumption. Savings are invested either domestically or abroad. Therefore, a country's total saving is the sum of its domestic investment plus its net foreign investment (I f = capital outflow-capital inflow). With floating exchange rates, net foreign investment is (roughly) equal to the current account balance (CA). 3 Therefore, domestic investment, positive exports, relatively low imports, and investment earnings from abroad are the components of a nation's personal savings: Sav = GNI - C - G = I + EX - IM + NFP = I + CA = I + I f To gain more understanding of the sources of saving and investment, we can disaggregate total saving into government (Sav G ) and private (Sav P ) savings. Government savings are tax receipts (T) in excess of spending (G), or T-G. These "savings" are negative for countries that have government budget deficits. Private savings are whatever is left to the public out of GNI after consumption expenses and taxes are paid, GNI-C-T. By either direct substitution, or by 3 In the sequel, the BOP discussion explains the (roughly), which is due to international government transactions. In our figures, the financial account is negative If. GNI and BOP Accounts- 6

disaggregation of savings into its personal and government parts, we have Sav P = GNI - C - T = I + EX - IM + NFP - Sav G = I + CA - Sav G All else equal, high government expenditure (negative government saving or deficits) must be offset by personal savings. U.S. Savings and Current Account Experience The U.S. is currently plagued by high private and high government consumption levels. Current GNI accounts reveal low savings, low investment, trade deficits, and declining net foreign investment earnings. If we look to Figure 2, we see in five out of six recessions and slowdown, that savings fell as a proportion of. Though it is common wisdom about a recovery stage that individuals, effectively, replenished their savings levels, the data doesn t generally support this view: This phemenon occurred in only two out of six cases. Throughout the observed history, personal saving and government spending moved inversely. Figure 2 GNI and BOP Accounts- 7

Through 2009, the U.S. savings rate has had intermittent increases along a falling trend. In 2009, savings reached its minimum, 11.4%, and rose through 2015. For 2016-2017, savings fell slightly. Until 2009, personal savings were also falling, and were not offset by higher government saving. Since 2009, high government deficits (Deficits) have offset higher personal savings, and led to continued low levels of total savings. Through 2006, the only reason that investment in U.S. firms remained at its average historic level of 19% was due to foreign investment. This investment funded the U.S. current account deficit, and, effectively, traded the high level of U.S. consumption for foreign ownership of U.S. production capacity. Since 2009, U.S. investment rose back up toward 20% of GNI and foreign financial investment has also fallen by 2%. Coming out of the 2008-9 recession, a 2% recovery in investment share was matched by a 6% savings increase, an 9% government deficit decrease, while personal savings fell 6%. Over the long-run, this situation is not sustainable without significant increases in U.S. productivity or decreases in U.S. life styles. Though the U.S. deficit has shrunk from its 2009 recession level, to 5%, the associated U.S. government debt issuance continues to rise. 4 This massive government borrowing need crowds private investment. Should interest rates rise, the cost of U.S. government debt will rise commensurately. The domestic investment outlook remains clouded. Coming out of the 1990 recession, an improving U.S. trade deficit was a positive growth factor. This improvement was caused by the fall in the value in the dollar, and its impact on U.S. international competitiveness, and the recessions' negative income effect leading to 4 The proportion of government debt as a percentage of 2017 GNI is 104%, up from 93% in 2010 and 43% in 1990. Debt service consumes roughly 2.3% of GNI, less than the 3% of 1990 and 2010. Lower current, debt service is due to lower levels of interest rates and higher GNI growth since 1990 and 2010. Nevertheless, the absolute size of this indebtedness and the the potential for higher levels of future interest rates both cloud U.S. economic growth and government funding outlooks. GNI and BOP Accounts- 8

lower U.S. imports. The 2009 recession differed with the current account worsening, and the dollar depreciating then appreciating relative to the Special Drawing Right (SDR) currency Baskets. The 2010 recovery began both with substantial trade deficits and a dollar that had depreciated by 20% since 2001 relative to the SDR. Improving current account performance is not offseting other negative savings factors. The relatively low savings-low domestically funded investment situation has not been remedied, and soon may well cause significant economic pain. The sustained U.S. recovery provides some causes for concern. Further allocation of resources into the consumption-service oriented sector may well continue to the detriment of the capital goods sector. A final conjecture regarding U.S. resource allocation is that the much bally-hooed service sector growth has been stimulated by these very same negative factors, not by a fundamental competitiveness shift. In our discussion, the U.S. has been characterized as a nation with low levels of savings, high domestic consumption, and relatively high imports. In terms of resource allocation, the service and consumption sectors grew, while the capital goods and export sectors shrunk. This situation is portrayed as the first stage of our introductory example. Alone in the world, the U.S. could not long sustain this position. Historically, it has not. The U.S. has become more and more intertwined in an international economy. Relatively, the foreign sector has grown in importance. Proof that this change has occurred is found in current U.S. economic conditions. Without the ready availability of foreign goods and investments, post-1970 output growth, employment growth, consumption, relatively high interest rates, and low investment would not have been possible. Instead, the 2008 economic seizure would have occurred sooner. GNI and BOP Accounts- 9

There are, certainly, positive factors for the U.S. First, marketbased economies almost always adjust, and in the longer-run do so in positive ways. One likely source of improving growth and competitiveness may be in a falling dollar value. Another is development may be in energy exploration and extraction, and technology. Lastly, continuing dollar use as a global medium of exchange is extraordinarily important. Generally, U.S. dollar value indicates the relative state of foreign demand for current U.S. output, operations, companies and property. To gain a better understanding of the impact of the foreign sector of the U.S. economy, we outline currency value determinants. These determinants are laid out in the balance of payments accounts. The Balance of Payments Overview The balance of payments (BOP) accounts are linked directly to Gross National Income (GNI). As already emphasized, exports and imports of goods and services, primary and secondary income make up the current account portion of GNI. The current account can be significantly positive or negative. However, any GNI imbalances must be funded by private investment flows or government action (such as foreign exchange reserve sales.) The BOP settles for all of these transaction flows on a net basis. The net international flow of current, capital, and government transactions must equal zero. Hence the net BOP is zero. Conceptually, the BOP accounts for the supplies and demands of a country's product and investment with the rest of the world. Since the associated trade and investment must be paid for in the countries' currencies, the BOP accounts for the sources of a country s currency supply and demand. These BOP credits (demands) and debits (supplies) determine currency values. We emphasize this definition of the balance of payments. We also consider how balance of payments account changes impact output, interest rates, and exchange rates. GNI and BOP Accounts- 10

A supply of a country's currency is termed a debit on its balance of payments. A demand for a country s currency is a credit. The supply of a currency, debits, will occur whenever anyone holding a country's currency trades that domestic currency for another. In turn, demands for a currency, credits, will occur whenever a holder of a foreign currency trades that currency for the domestic currency. Because the BOP must balance, all international trade, service, or investment transactions lead to both a credit and a debit on a country's balance of payments. Using the United States as an example, and considering it to be the domestic country, we have, Demand for (purchase of) dollars by holder of foreign currency is a U.S. BOP credit. Supply (sale) of dollars by holder of dollars for foreign currency is a U.S. BOP debit. At a point in time, an increase in the number of credits on the domestic country BOP tends to lead to an appreciation in the value of its currency. This result occurs because excess credits lead to an excess currency demand. This excess demand is met in one of two ways, dependent on whether a country has a floating or fixed exchange rate policy. Under a floating exchange rate policy, the currency facing excess demand will appreciate. The currency will increase in value until its appreciation leads some of those interested in purchasing this country s goods, services and investments to lower their demand at the now higher price. Under a fixed exchange rate policy, the central bank of a country must sell the domestic currency that is needed to meet excess market demand. Analogously, it must sell foreign currencies or other reserves to meet excess market supply. GNI and BOP Accounts- 11

In the excess demand case, the central bank sells its currency to those wanting to sell foreign currency, receives that foreign currency, and accumulates foreign currency reserves. In the face of excess currency supply, these reserves would be used to buy back the excess domestic country currency. The accumulation or loss of foreign currency reserves by a country's central bank indicates that it is following a less than freely floating exchange rate policy. As a brief summary, Floating Rate Policy Fixed Rate Policy Dollar Foreign Currency U.S. reserves Foreign. reserves Dollar demand and and/or Dollar supply Balance of Payments Accounting Four BOP accounts are of most interest: the current account, the basic balance, the official settlements balance, and the reserves transaction balance. Of the transactions underlying the BOP, goods and services exports and imports, short-term and long-term capital inflows and outflows, and reserve flows are the most important ones. The first three types of transactions are reported by businesses to their associated government agencies, and reserve flows are managed by the Central Bank. For the U.S., the Fed tabulates and publishes reserve flows weekly. U.S. and other major country trade flows are tabulated monthly, and reported at this frequency with at least a month delay. The other BOP components are usually reported quarterly, sometimes with significant delays. GNI and BOP Accounts- 12

Table 1 presents a breakdown of the United States Balance of Payments. This breakdown is consistent with the Department of Commerce definition of the balance of payments. 5 The Current Account The current account is the net balance of current international transactions. The current account shows whether a country is a net producer or consumer on the world market. The two largest components of the current account are the trade account and the service account. The trade account is simply merchandise-goods exports less merchandise-goods imports. The service account balance is also a simple difference of service exports and service imports. However, the classification of service flows can be confusing. Some examples of service exports and imports, and their associated impact on the U.S. balance of payments, credit(+) and debit(-), are the following: Merchandise Trade Export (+) Import (-) Tourism American Abroad (-) Foreigner in U.S. (+) Transport United Airline Flight by Foreigner (+) U.S. Citizen on Lufthaunsa (-) Consulting Booz Allen for Paris firm (+) Insurance Premium by British to Aetna (+) Premium by Citibank to Lloyds (-) Dividends Paid by Sony to you (+) Paid by IBM to France (-) The service transactions are identified as credits or debits dependent on whether they will generally lead to a domestic currency demand or supply. 5 See the June 1978 issue of the Department of Commerce Survey of Current Business for a more detailed discussion. See also IMF BPM6. https://www.imf.org/external/pubs/ft/bop/2007/pdf/bpm6.pdf GNI and BOP Accounts- 13

The sum of all goods and services transactions is the balance on goods and services. This balance shows how a country is doing relative to the rest of the world in production of goods and services. In this balance, net service exports and imports are added to the trade balance. Unfortunately, the press tends to emphasize the trade balance in its reports on worldwide competitiveness. For example in the 1970 s, the U.S. was a net exporter of services and a net importer of goods. In this case, a basic competitiveness problem was often reported, but not clearly manifest. GNI and BOP Accounts- 14

Table 1 REPRESENTATIVE U.S. BALANCE OF PAYMENTS ACCOUNT TRANSACTIONS (table line numbers correspond to U.S. Dept. of Commerce definitions) (+) credits (-) debits 1. MERCHANDISE TRADE Export of good (2) + Import of good (18) - TRADE BALANCE +/- 2. SERVICES Export of transportation service (5-6), Tourist services (4), financial services (9), Capital services (11-15), military equipment (3) + Import of transportation service (21-22), tourist services (20), financial services (25), capital services (27-31), military expenditures (19) - 1 + 2 = BALANCE ON GOODS AND SERVICES +/- 3. PRIMARY INCOME Receipt of gift and income related flow to relative abroad (36) - Receipt of gift and income related flow t from foreign relative (36) + labor and investment (direct, portfolio, other loans/deposits) income to U.S or from abroad (35) - +/- 3. SECONDARY INCOME Current transfers refer to unilateral receipts and payments between residents and non-residents - 1+2+3+4 = CURRENT ACCOUNT +/- 4. LONG-TERM CAPITAL PRIVATE CAPITAL FLOWS FOREIGN DIRECT INVESTMENT FLOWS U.S. firm invests in foreign affiliate (49-50) - U.S. firm reduces claims on foreign affiliate (49-50) Foreign firm invests in U.S. affiliate (66-67) + Foreign firm reduces claim on U.S. affiliate (66-67) - LONG-TERM PRIVATE PORTFOLIO INVESTMENT FLOWS U.S. resident purchases or sells foreign stock or bond (51) + or - U.S. resident issues long-term credit to foreigner (52) - U.S. bank makes long-term foreign loan (54) - U.S. bank receives principal payment on foreign loan (54) + Foreign resident purchases U.S. Treasury security (68) + Foreign resident purchases non-treasury U.S. stock or bond (69) Foreign resident issues long-term credit to U.S. resident (70) + Foreign bank makes long-term U.S. loan (72) + Foreign bank receives principal on U.S. loans (72) - 1 + 2 + 3 + 4 = BASIC BALANCE +/- 5. SHORT-TERM PRIVATE INVESTMENT FLOWS U.S. resident invests in foreign commercial paper (53) - U.S. resident increases foreign deposits in foreign bank (55) - U.S. resident reduces foreign deposits in foreign bank (55) + Foreign resident invests in U.S. commercial paper (71) + Foreign resident increases dollar deposits in U.S. bank (73) + Foreign resident reduces dollar deposits in U.S. bank (73) - 1 + 2 + 3 + 4 + 5 = OFFICIAL SETTLEMENTS BALANCE +/- 6. ERRORS AND OMMISSIONS, STATISTICAL DISCREPANCY (75) +/- RESERVE TRANSACTIONS BALANCE +/- 7. OFFICIAL CAPITAL OR RESERVE FLOWS- GOVERNMENT CAPITAL FLOWS NON-OFFICIAL FLOWS U.S. government makes short or long-term foreign loans (44 or 46) - OFFICIAL OR RESERVE FLOWS U.S. government purchases gold (39), SDRs (40), foreign currencies (42) - U.S. government sells gold (39), SDRs (40), or foreign currencies (42) + Foreign government purchases Treasury bills (59), other U.S. government liabilities (61), private security (63) + Foreign government sells Treasury bills (59), other U.S. government liabilities (61), private securities (63) - GNI and BOP Accounts- 15

A good source of international balance of payments information is the International Monetary Fund's (IMF) International Financial Statistics (IFS), both the yearbook and monthly volumes. A broad range of economic and financial data is published in this source. The 2017 U.S. Balance of Payments section is reproduced in Table 2. As an example, we review these figures. Table 2 UNITED STATES BALANCE OF PAYMENTS Source: International Monetary Fund, International Financial Statistics (IFS) http://data.imf.org/?sk=388dfa60-1d26-4ade-b505- A05A558D9A42&sId=1479329132316 United States (IFS Country # 111) Balance of Payments 2017 GOODS, CREDIT (EXPORTS) (BXG_BP6_USD) 1553.4 GOODS, DEBIT (IMPORTS) (BMG_BP6_USD) 2360.9 BALANCE ON GOODS (BG_BP6_USD) -807.5 SERVICES, CREDIT (EXPORTS) (BXS_BP6_USD) 797.7 SERVICES, DEBIT (IMPORTS) (BXS_BP6_USD) 542.5 BALANCE ON GOODS AND SERVICES (BGS_BP6_USD) -552.3 PRIMARY INCOME: CREDIT (BXIP_BP6_USD) 928.1 PRIMARY INCOME: DEBIT (BMIP_BP6_USD) 706.4 BALANCE ON GOODS, SERVICES, AND PRIMARY INCOME (BTGSI_BP6_USD) -330.5 UNITARY TRANSFERS/SECONDARY INCOME: CREDIT (BXISXF_BP6_USD) 154.0 UNITARY TRANSFERS/SECONDARY INCOME: DEBIT (BMIP_BP6_USD) 272.6 CURRENT ACCOUNT, N.I.E.(BCAXF_BP6_USD) -449.1 CAPITAL ACCOUNT* (BKAA_BP6_USD) 24.8 DIRECT INVESTMENT (BFDA_BP6_USD & BFDLXF_BP6_USD) -24.4 PORTFOLIO INVESTMENT (BFPA_BP6_USD & BFPLXF_BP6_USD) 212.5 OTHER INVESTMENT (BFOA_BP6_USD & BFOLXF_BP6_USD) 165.2 FINANCIAL DERIVATIVES: NET (CURRENT ACCOUNT, N.I.E.(111109BXZF)) -23.1 FINANCIAL ACCOUNT* (BFXF_BP6_USD) 330.2 OFFICIAL SETTLEMENTS BALANCE (1113DZLAZF) -94.2 NET ERRORS AND OMISSIONS (1114Y9NAZF) 92.5 RESERVE TRANSACTION BALANCE (111409NAZF) -1.7 RESERVE ASSETS (1114Z9NAZF) --1.7 The trade deficit was $807.5 billion. Service exports were $797.7 billion, while imports of services were a $542.5 billion debit. Therefore, the service balance was a $255.2 billion credit, which brought the 2017 GNI and BOP Accounts- 16