Is the US Current Account Deficit Sustainable?
hssp://www.stern.nyu.edu/globalmacro/...ni-Setser-US-External-Imbalances.pdf
Auszug:
The US as a Net Debtor: The Sustainability of the US External Imbalances Nouriel Roubini Stern School of Business, NYU and Brad Setser Research Associate, Global Economic Governance Programme, University College, Oxford First Draft: September 2004
Executive Summary
trade deficit of around $420 billion in 2003 became a deficit of roughly $500 billion in 2004 and, if oil prices stay high, is on track – extrapolating from recent monthly trade data – to reach $550-560 billion for 2004. Imports are currently growing slightly faster than exports (in percentage terms).
..............
Yet even if imports grew at the same pace as exports, the large gap between the size of the U.S. import base and size of the U.S. export base would lead the U.S. trade balance to deteriorate. These trade deficits are large absolutely, large relative to U.S. GDP and large relative to the United States’ small export base. They imply an even larger deficit in the broader measure of the United States’ external balance, the current account.
1 These large current account deficits and the resulting increase in the net foreign liabilities of the U.S. has led to increasing concerns about the sustainability of these external imbalances. The U.S. trade deficit is the counterpart to low U.S. savings. U.S. consumption and other components of expenditure have been growing faster than U.S. income in the last decade. In mid-late 1990s, the current account deficits reflected a combination of low private savings and strong private investment, not large budget deficits. The financial resources needed to support a surge in private investment were imported from abroad, allowing both consumption and investment to rise.
Since 2001, however, the current account deficit has reflected a widening government deficit, not strong private investment. The U.S. now borrows from abroad to allow the government to run a large fiscal deficit without crowding out private investment, even as growing consumption (and necessarily, very low private savings) reduce the United States’ ability to finance the fiscal deficit and private investment domestically. No matter what their cause, large ongoing deficits have to be financed by borrowing from abroad (or by foreign direct investment or net foreign purchases of U.S. stocks). Sustained deficits have made the United States a major net debtor. The broadest measure of the amount the United States owes the rest of the world – the net international investment position or NIIP – has gone from negative $360 billion in 1997 to negative $2.65 trillion in 2003. At the end of 2004, we estimate the net international position will be negative $3.25 trillion. Relative to GDP, net debt rose from 5% of GDP in 1997 to 24% of GDP at the end of 2003 and to an expected 28% of GDP by the end of 2004. Trends are no more encouraging when U.S. external debt is assessed in relation to U.S. export revenues. Exports as a share of GDP dipped a bit during the Asian crisis but then recovered and stood at 11% of GDP in 2001. But exports then slipped dramatically between 2001 and 2003, falling to a low of 9.5% of GDP in 2003 before starting to recover in 2004. Rising external debt and falling exports is never a good combination.
1 The current account is the sum of the trade balance, the balance on labor income, the balance on international investment income and unilateral transfers (foreign aid and remittances).
..........
2 At an estimated 280% of exports at the end of 2004 , U.S. debt to export ratio is in shooting range of troubled Latin economies like Brazil and Argentina.2 A large, and rapidly growing, stock of external debt – the legacy of our past current account deficits - has not, to date, been much of a burden on the U.S. economy. The U.S. had had no problem adding to its external debt stock to finance ongoing current account deficits. Interest payments on existing external debt have not been a burden on the U.S. economy. The United States has lots of external assets as well as lots of external liabilities. Since U.S. assets have had so far a higher rate of return than U.S. liabilities, the U.S. earned more on its assets than it paid on its liabilities in 2003. This relatively positive state of affairs, however, is likely to change. The limited cost of the existing U.S. debt reflects the unusually low U.S. interest rates, and the willingness of external investors to continue to finance large U.S. current account deficits at these low rates. As debt stocks rise and interest rates return to more normal levels, the need to make net payments on the existing debt stock will start to exert a small, but still noticeable drag on the economy. The fall in interest rates reduced interest payments on existing US external debt by roughly $130 billion between in 2000 and 2004.
..............
3 The rapid deterioration of US net external debt position implied by large trade and current account deficits cannot continue indefinitely. At some point, the interest rate that the U.S. needs to pay to attract the external financing it needs to run ongoing deficits will rise, slowing the U.S. economy and improving the trade balance even as higher interest rates increase the amount the U.S. must pay to its existing creditors. The U.S. will increasingly have to learn to live with the vulnerabilities associated with being a major net debtor -- vulnerabilities that are attenuated by the dollar’s continued position as a reserve currency, but not entirely eliminated. Large current deficits in the U.S. have to be offset by current account surpluses elsewhere, and rising U.S. debt implies that foreigners are increasingly their holdings of financial claims on the U.S.. Both Europe and East Asia (taken as a region) run substantial current account surpluses vis-à-vis the U.S.. However, the major European currencies float freely against the dollar while most Asian currencies do not. China, Malaysia, Hong Kong explicitly peg their currencies to the dollar, and other countries often intervene heavily to prevent their currencies from appreciating against the dollar (and the Chinese renminbi). Recent data leaves little doubt that the reserve accumulation of Asian central banks is financing a growing share of the United States’ current account
................
The U.S. current account deficit, in turn, provides an enormous stimulus to East Asian economies.4 So far, the U.S. has been able to avoid most of the standard costs associated with being a major debtor by passing all financial risks off to its creditors – a most unusual outcome. But that means that the United States’ creditors, in particular East Asian central banks, are taking on the risk. This system – a system that Dooley, Folkerts-Landau and Garber (2003, 2004 a, b) have labeled Bretton Woods Two -- has provided the U.S. with the financing it needed in 2002, 2003 and 2004 to run large current account deficits. But the tensions created by this system are large, large enough to crack the system in the next three to four years.
.................
• Right now, the US has to mortgage one year’s worth of export revenues every two years to finance its trade deficit. That is not a sustainable pace. It is hard to run a current account deficit of more than 5% of GDP off a roughly 10% of GDP export base. U.S. external debt is no longer small in relation to United States’ small export sector. • Barring a U.S. recession, the U.S. current account deficit is likely to expand, not contract. The dollar’s recent depreciation against the euro has not been matched by a comparable depreciation against many other U.S. trade partners. The real dollar remains at its 1990-2004 average, a level that is probably consistent with continued, albeit more modest, increase in the trade deficit. As favorable shocks to income payments from the recent fall in US interest rates dissipate, net income payments will turn negative, adding to the current account deficit. The likely outcome, absent any major policy changes: current account deficits of more than 7% of GDP by 2008. • This deficit is not being financed by foreign direct investment the US, nor is it significantly financed by foreign purchases of U.S. stocks. Outward foreign direct investment has substantially exceeded inward foreign direct investment over the past few years, so the U.S. needs to finance outward foreign direct investment of $100-$150 billion as well as a current account deficit of at least $550 billion. The annual borrowing need of the United States is $700 billion or more. Unless trends change that will only grow. • The “resource gap”, i.e. the gap between the U.S. trade balance and the trade balance required to stop the increase in the U.S. net external debt to GDP ratio is above 5% of GDP. This means that stabilizing the external debt to GDP ratio at current levels would require reducing the trade deficit (augmented by unilateral transfers and labor payments) by about 5% of GDP, even with optimistic assumptions about the real interest rate on U.S. net external debt. • Barring immediate adjustment in the trade balance to stabilize the debt ratio right away, the amount of adjustment needed to stabilize the external debt to
....................
4 East Asia runs a current account surplus with the rest of the world, with its large surplus in bilateral trade to the U.S. offsetting deficits from commodity exporting regions. Intra-regional trade in East Asia has been growing, but some of that growth stems indirectly from growing trade with the U.S., as many Asian economies are supplying components or capital goods to China, which is becoming the world’s manufacturing center.
..............
4 GDP ratio is likely to become larger for two reasons: 1) a higher debt stock implies a larger trade surplus to stabilize the debt ratio; 2) delayed stabilization and higher external debt stocks will lead to higher interest rates and lower growth, thus further increasing the trade surplus necessary to stabilize the debt ratio. • Without additional adjustment, net debt is on track to increase to about 50% of GDP and almost 500% of export revenues in 2008.
.................
• Private investors are unlikely to be willing to finance deficits of that magnitude at current low interest rates, particularly since the adjustment in the dollar required to eventually stabilize the external debt to GDP ratio implies large capital losses for holders of low-yielding dollar denominated securities (if the adjustment occurs through a fall in U.S. growth, equity investors in the U.S. will take losses). Asian central banks have been willing to finance US deficits despite the risk of future capital losses to support their own export-led growth. However, the scale of financing required from Asian central banks to sustain current account deficits of this magnitude likely exceeds the absorption capacity of Asian central banks. If current trends continue, Asian central bank reserves would have to rise from an estimated $2.3-2.4 trillion at the end of 2004 to $4.3 trillion dollars at the end of 2008 to help support a rise in U.S. net external debt from $3.3 trillion to $6.9 trillion. Chinese and Japanese reserves would need to rise from $1.1 trillion to $2.4 trillion.
• This calculation likely understates the amount of financing the U.S. would need from Asian reserves to sustain current trends. Foreign central banks, mostly East Asian central banks, provided about half the financing the U.S. needs to sustain its current account deficit in 2003. As debt levels rise, private investors are likely to become less willing to finance ongoing U.S. current account deficits at anything like current interest rates. Unless foreign banks step up their financing, the U.S. would need to adjust. • Valuation effects – capital losses for non-residents, capital gains for residents – have limited the increase in the U.S. NIIP in 2002 and 2003. The depreciation in the real value of the US dollar in 2002-2003 increased the dollar value of U.S. external assets (many of which are denominated in foreign currencies), and the rising value of U.S. external assets helped offset the impact of ongoing flow deficits on the NIIP. However, the scope for large valuation gains is likely to be more modest going forward, as the prospective valuation gains from adjusting vis-à-vis Asian currencies are much more modest than the valuation gains from adjusting vis-à-vis the major European currencies. Moreover, the U.S. should not count on being able to fool all of the people all of the time: expected persistent real depreciation of the U.S. dollar would lead foreigners to require ex-ante higher returns on their US dollar asset holdings to minimize their capital losses. Even if East Asia is willing to continue to finance large US current account deficits, it is unlikely to be willing to do so on the current, very favorable terms – terms that guarantee East Asian central banks and many other U.S. creditors large losses should the dollar eventually depreciate against their currency.
..................
5 Pulling off the adjustment needed to unwind the current U.S. external deficit smoothly will be a major policy challenge, both for the U.S. and the world. It is far easier for the needed adjustment to happen smoothly if it starts sooner rather than later: Smooth adjustment means a trade deficit of 5% of GDP gradually falls, with the U.S. adding to its external debt stock both absolutely and in relation to its income during the adjustment process. Our projections suggest that the U.S. external debt to GDP ratio double over the medium-long run – peaking at around 50% of GDP after 2010 -- even if the U.S. trade deficit started to shrink by about 0.5% of GDP annually.5 Such a measured adjustment would eliminate the trade deficit by 2015; faster adjustment would be hard to square with sustained US and global growth. If the U.S. waits until its debt to GDP ratio is already at 40 or 50% of GDP before beginning the needed adjustment, the U.S. will have less leeway to allow its external debt to rise during a process of gradual adjustment. Not only will the needed adjustment be larger, but the adjustment will likely happen much faster. Such sharp adjustment would not pleasant, either for the U.S. or for the rest of the world. As many analysts have noted, reducing the U.S. trade deficit will require that US income grow faster than consumption and overall domestic expenditure. The only way this can happen without a slowdown in U.S. growth is if exports growth picks up the slack, and net exports start to drive the U.S. economy. The rest of the world, and in particular dynamic Asian economies, must shift from relying on U.S. demand to spur its growth to providing a surplus of demand that helps support U.S. growth, just as the U.S. shifts from an economy driven by consumption growth to an economy driven by income growth. In other words, current patterns need to reverse themselves. The large U.S. current account deficit reflects macroeconomic policy choices, notably the large U.S. fiscal deficit and East Asian government’s policies of reserve accumulation to support export-led growth. Consequently, the needed adjustment in the U.S. current account deficit will happen smoothly only if backed by supportive macroeconomic policies, including: • Fiscal adjustment in the United States. A low savings economy like the U.S. can only run large budget deficits without crowding out domestic investment by drawing on the world’s savings. Right now, the U.S. depends on Asian reserve accumulation for cheap financing of its budget deficits cheaply. Put differently, if the U.S. continued to run a large deficit and Asia reduced its pace of reserve accumulation, U.S. interest rates would have to rise, crowding out productive investment. Recently, the U.S. has sacrificed exports (and jobs in export sectors of the economy) for cheap financing from East Asia (and jobs in interest sensitive sectors of the economy). The U.S. economy can only reduce its dependence on cheap financing if the U.S. government reduces its own borrowing need.
................
5 Since 2001, the U.S. trade deficit has deteriorated at a similar pace. Such adjustment requires US exports to grow roughly twice as fast as US imports.
....................
6 • Exchange rate adjustment and policies that support demand growth in East Asia. A current account deficit of 5% of U.S. GDP cannot be reduced if the fastest growing, most dynamic parts of the world economy continue to maintain exchange rates that suppress domestic consumption by keeping the domestic price of imports high. Europe has already let its exchange rate adjust, and, even with policies directed at supporting domestic demand growth, the aging, already developed economies of Europe will not be able to contribute as much to global demand as younger, more dynamic economies.
...........
• China sits at the center not just of East Asia’s economy, but also of the global economy. China is now too big not to play a more constructive role in global economic management. Given its large stock of reserves, its rapidly expanding economy and its ability to attract $50 billion a year in foreign direct investment, there is no reason why China should not run a modest current account deficit. The rest of Asia will not adjust if China does not adjust.
.................
Introduction This paper analyzes the sustainability of U.S. external deficits6 and the “Bretton Woods Two” international monetary system that is integral to their financing. It therefore examines the sustainability of what Larry Summers has called the “balance of financial terror”7 – a system whose stability hinges on the willingness of Asian central banks to both hold enormous amounts of US Treasuries (and other US fixed income securities) and to add to their already enormous stocks to provide the ongoing financial flows needed to sustain the U.S. current account deficit and the Bretton Woods Two system.
..................
Our analysis suggests that the Bretton Woods Two system is fragile, and likely will prove unstable. Even if the United States continues to maintain a privileged place in the international monetary system and thus remains able to borrow on terms that other, comparable, debtors could not imagine, our analysis suggests that the U.S. is on an unsustainable and dangerous path.
Eine ausgezeichnete Analyse von Nouriel Roubini und Brad Setser von der New York Universität, September 2004.
hssp://www.stern.nyu.edu/globalmacro/...ni-Setser-US-External-Imbalances.pdf
Auszug:
The US as a Net Debtor: The Sustainability of the US External Imbalances Nouriel Roubini Stern School of Business, NYU and Brad Setser Research Associate, Global Economic Governance Programme, University College, Oxford First Draft: September 2004
Executive Summary
trade deficit of around $420 billion in 2003 became a deficit of roughly $500 billion in 2004 and, if oil prices stay high, is on track – extrapolating from recent monthly trade data – to reach $550-560 billion for 2004. Imports are currently growing slightly faster than exports (in percentage terms).
..............
Yet even if imports grew at the same pace as exports, the large gap between the size of the U.S. import base and size of the U.S. export base would lead the U.S. trade balance to deteriorate. These trade deficits are large absolutely, large relative to U.S. GDP and large relative to the United States’ small export base. They imply an even larger deficit in the broader measure of the United States’ external balance, the current account.
1 These large current account deficits and the resulting increase in the net foreign liabilities of the U.S. has led to increasing concerns about the sustainability of these external imbalances. The U.S. trade deficit is the counterpart to low U.S. savings. U.S. consumption and other components of expenditure have been growing faster than U.S. income in the last decade. In mid-late 1990s, the current account deficits reflected a combination of low private savings and strong private investment, not large budget deficits. The financial resources needed to support a surge in private investment were imported from abroad, allowing both consumption and investment to rise.
Since 2001, however, the current account deficit has reflected a widening government deficit, not strong private investment. The U.S. now borrows from abroad to allow the government to run a large fiscal deficit without crowding out private investment, even as growing consumption (and necessarily, very low private savings) reduce the United States’ ability to finance the fiscal deficit and private investment domestically. No matter what their cause, large ongoing deficits have to be financed by borrowing from abroad (or by foreign direct investment or net foreign purchases of U.S. stocks). Sustained deficits have made the United States a major net debtor. The broadest measure of the amount the United States owes the rest of the world – the net international investment position or NIIP – has gone from negative $360 billion in 1997 to negative $2.65 trillion in 2003. At the end of 2004, we estimate the net international position will be negative $3.25 trillion. Relative to GDP, net debt rose from 5% of GDP in 1997 to 24% of GDP at the end of 2003 and to an expected 28% of GDP by the end of 2004. Trends are no more encouraging when U.S. external debt is assessed in relation to U.S. export revenues. Exports as a share of GDP dipped a bit during the Asian crisis but then recovered and stood at 11% of GDP in 2001. But exports then slipped dramatically between 2001 and 2003, falling to a low of 9.5% of GDP in 2003 before starting to recover in 2004. Rising external debt and falling exports is never a good combination.
1 The current account is the sum of the trade balance, the balance on labor income, the balance on international investment income and unilateral transfers (foreign aid and remittances).
..........
2 At an estimated 280% of exports at the end of 2004 , U.S. debt to export ratio is in shooting range of troubled Latin economies like Brazil and Argentina.2 A large, and rapidly growing, stock of external debt – the legacy of our past current account deficits - has not, to date, been much of a burden on the U.S. economy. The U.S. had had no problem adding to its external debt stock to finance ongoing current account deficits. Interest payments on existing external debt have not been a burden on the U.S. economy. The United States has lots of external assets as well as lots of external liabilities. Since U.S. assets have had so far a higher rate of return than U.S. liabilities, the U.S. earned more on its assets than it paid on its liabilities in 2003. This relatively positive state of affairs, however, is likely to change. The limited cost of the existing U.S. debt reflects the unusually low U.S. interest rates, and the willingness of external investors to continue to finance large U.S. current account deficits at these low rates. As debt stocks rise and interest rates return to more normal levels, the need to make net payments on the existing debt stock will start to exert a small, but still noticeable drag on the economy. The fall in interest rates reduced interest payments on existing US external debt by roughly $130 billion between in 2000 and 2004.
..............
3 The rapid deterioration of US net external debt position implied by large trade and current account deficits cannot continue indefinitely. At some point, the interest rate that the U.S. needs to pay to attract the external financing it needs to run ongoing deficits will rise, slowing the U.S. economy and improving the trade balance even as higher interest rates increase the amount the U.S. must pay to its existing creditors. The U.S. will increasingly have to learn to live with the vulnerabilities associated with being a major net debtor -- vulnerabilities that are attenuated by the dollar’s continued position as a reserve currency, but not entirely eliminated. Large current deficits in the U.S. have to be offset by current account surpluses elsewhere, and rising U.S. debt implies that foreigners are increasingly their holdings of financial claims on the U.S.. Both Europe and East Asia (taken as a region) run substantial current account surpluses vis-à-vis the U.S.. However, the major European currencies float freely against the dollar while most Asian currencies do not. China, Malaysia, Hong Kong explicitly peg their currencies to the dollar, and other countries often intervene heavily to prevent their currencies from appreciating against the dollar (and the Chinese renminbi). Recent data leaves little doubt that the reserve accumulation of Asian central banks is financing a growing share of the United States’ current account
................
The U.S. current account deficit, in turn, provides an enormous stimulus to East Asian economies.4 So far, the U.S. has been able to avoid most of the standard costs associated with being a major debtor by passing all financial risks off to its creditors – a most unusual outcome. But that means that the United States’ creditors, in particular East Asian central banks, are taking on the risk. This system – a system that Dooley, Folkerts-Landau and Garber (2003, 2004 a, b) have labeled Bretton Woods Two -- has provided the U.S. with the financing it needed in 2002, 2003 and 2004 to run large current account deficits. But the tensions created by this system are large, large enough to crack the system in the next three to four years.
.................
• Right now, the US has to mortgage one year’s worth of export revenues every two years to finance its trade deficit. That is not a sustainable pace. It is hard to run a current account deficit of more than 5% of GDP off a roughly 10% of GDP export base. U.S. external debt is no longer small in relation to United States’ small export sector. • Barring a U.S. recession, the U.S. current account deficit is likely to expand, not contract. The dollar’s recent depreciation against the euro has not been matched by a comparable depreciation against many other U.S. trade partners. The real dollar remains at its 1990-2004 average, a level that is probably consistent with continued, albeit more modest, increase in the trade deficit. As favorable shocks to income payments from the recent fall in US interest rates dissipate, net income payments will turn negative, adding to the current account deficit. The likely outcome, absent any major policy changes: current account deficits of more than 7% of GDP by 2008. • This deficit is not being financed by foreign direct investment the US, nor is it significantly financed by foreign purchases of U.S. stocks. Outward foreign direct investment has substantially exceeded inward foreign direct investment over the past few years, so the U.S. needs to finance outward foreign direct investment of $100-$150 billion as well as a current account deficit of at least $550 billion. The annual borrowing need of the United States is $700 billion or more. Unless trends change that will only grow. • The “resource gap”, i.e. the gap between the U.S. trade balance and the trade balance required to stop the increase in the U.S. net external debt to GDP ratio is above 5% of GDP. This means that stabilizing the external debt to GDP ratio at current levels would require reducing the trade deficit (augmented by unilateral transfers and labor payments) by about 5% of GDP, even with optimistic assumptions about the real interest rate on U.S. net external debt. • Barring immediate adjustment in the trade balance to stabilize the debt ratio right away, the amount of adjustment needed to stabilize the external debt to
....................
4 East Asia runs a current account surplus with the rest of the world, with its large surplus in bilateral trade to the U.S. offsetting deficits from commodity exporting regions. Intra-regional trade in East Asia has been growing, but some of that growth stems indirectly from growing trade with the U.S., as many Asian economies are supplying components or capital goods to China, which is becoming the world’s manufacturing center.
..............
4 GDP ratio is likely to become larger for two reasons: 1) a higher debt stock implies a larger trade surplus to stabilize the debt ratio; 2) delayed stabilization and higher external debt stocks will lead to higher interest rates and lower growth, thus further increasing the trade surplus necessary to stabilize the debt ratio. • Without additional adjustment, net debt is on track to increase to about 50% of GDP and almost 500% of export revenues in 2008.
.................
• Private investors are unlikely to be willing to finance deficits of that magnitude at current low interest rates, particularly since the adjustment in the dollar required to eventually stabilize the external debt to GDP ratio implies large capital losses for holders of low-yielding dollar denominated securities (if the adjustment occurs through a fall in U.S. growth, equity investors in the U.S. will take losses). Asian central banks have been willing to finance US deficits despite the risk of future capital losses to support their own export-led growth. However, the scale of financing required from Asian central banks to sustain current account deficits of this magnitude likely exceeds the absorption capacity of Asian central banks. If current trends continue, Asian central bank reserves would have to rise from an estimated $2.3-2.4 trillion at the end of 2004 to $4.3 trillion dollars at the end of 2008 to help support a rise in U.S. net external debt from $3.3 trillion to $6.9 trillion. Chinese and Japanese reserves would need to rise from $1.1 trillion to $2.4 trillion.
• This calculation likely understates the amount of financing the U.S. would need from Asian reserves to sustain current trends. Foreign central banks, mostly East Asian central banks, provided about half the financing the U.S. needs to sustain its current account deficit in 2003. As debt levels rise, private investors are likely to become less willing to finance ongoing U.S. current account deficits at anything like current interest rates. Unless foreign banks step up their financing, the U.S. would need to adjust. • Valuation effects – capital losses for non-residents, capital gains for residents – have limited the increase in the U.S. NIIP in 2002 and 2003. The depreciation in the real value of the US dollar in 2002-2003 increased the dollar value of U.S. external assets (many of which are denominated in foreign currencies), and the rising value of U.S. external assets helped offset the impact of ongoing flow deficits on the NIIP. However, the scope for large valuation gains is likely to be more modest going forward, as the prospective valuation gains from adjusting vis-à-vis Asian currencies are much more modest than the valuation gains from adjusting vis-à-vis the major European currencies. Moreover, the U.S. should not count on being able to fool all of the people all of the time: expected persistent real depreciation of the U.S. dollar would lead foreigners to require ex-ante higher returns on their US dollar asset holdings to minimize their capital losses. Even if East Asia is willing to continue to finance large US current account deficits, it is unlikely to be willing to do so on the current, very favorable terms – terms that guarantee East Asian central banks and many other U.S. creditors large losses should the dollar eventually depreciate against their currency.
..................
5 Pulling off the adjustment needed to unwind the current U.S. external deficit smoothly will be a major policy challenge, both for the U.S. and the world. It is far easier for the needed adjustment to happen smoothly if it starts sooner rather than later: Smooth adjustment means a trade deficit of 5% of GDP gradually falls, with the U.S. adding to its external debt stock both absolutely and in relation to its income during the adjustment process. Our projections suggest that the U.S. external debt to GDP ratio double over the medium-long run – peaking at around 50% of GDP after 2010 -- even if the U.S. trade deficit started to shrink by about 0.5% of GDP annually.5 Such a measured adjustment would eliminate the trade deficit by 2015; faster adjustment would be hard to square with sustained US and global growth. If the U.S. waits until its debt to GDP ratio is already at 40 or 50% of GDP before beginning the needed adjustment, the U.S. will have less leeway to allow its external debt to rise during a process of gradual adjustment. Not only will the needed adjustment be larger, but the adjustment will likely happen much faster. Such sharp adjustment would not pleasant, either for the U.S. or for the rest of the world. As many analysts have noted, reducing the U.S. trade deficit will require that US income grow faster than consumption and overall domestic expenditure. The only way this can happen without a slowdown in U.S. growth is if exports growth picks up the slack, and net exports start to drive the U.S. economy. The rest of the world, and in particular dynamic Asian economies, must shift from relying on U.S. demand to spur its growth to providing a surplus of demand that helps support U.S. growth, just as the U.S. shifts from an economy driven by consumption growth to an economy driven by income growth. In other words, current patterns need to reverse themselves. The large U.S. current account deficit reflects macroeconomic policy choices, notably the large U.S. fiscal deficit and East Asian government’s policies of reserve accumulation to support export-led growth. Consequently, the needed adjustment in the U.S. current account deficit will happen smoothly only if backed by supportive macroeconomic policies, including: • Fiscal adjustment in the United States. A low savings economy like the U.S. can only run large budget deficits without crowding out domestic investment by drawing on the world’s savings. Right now, the U.S. depends on Asian reserve accumulation for cheap financing of its budget deficits cheaply. Put differently, if the U.S. continued to run a large deficit and Asia reduced its pace of reserve accumulation, U.S. interest rates would have to rise, crowding out productive investment. Recently, the U.S. has sacrificed exports (and jobs in export sectors of the economy) for cheap financing from East Asia (and jobs in interest sensitive sectors of the economy). The U.S. economy can only reduce its dependence on cheap financing if the U.S. government reduces its own borrowing need.
................
5 Since 2001, the U.S. trade deficit has deteriorated at a similar pace. Such adjustment requires US exports to grow roughly twice as fast as US imports.
....................
6 • Exchange rate adjustment and policies that support demand growth in East Asia. A current account deficit of 5% of U.S. GDP cannot be reduced if the fastest growing, most dynamic parts of the world economy continue to maintain exchange rates that suppress domestic consumption by keeping the domestic price of imports high. Europe has already let its exchange rate adjust, and, even with policies directed at supporting domestic demand growth, the aging, already developed economies of Europe will not be able to contribute as much to global demand as younger, more dynamic economies.
...........
• China sits at the center not just of East Asia’s economy, but also of the global economy. China is now too big not to play a more constructive role in global economic management. Given its large stock of reserves, its rapidly expanding economy and its ability to attract $50 billion a year in foreign direct investment, there is no reason why China should not run a modest current account deficit. The rest of Asia will not adjust if China does not adjust.
.................
Introduction This paper analyzes the sustainability of U.S. external deficits6 and the “Bretton Woods Two” international monetary system that is integral to their financing. It therefore examines the sustainability of what Larry Summers has called the “balance of financial terror”7 – a system whose stability hinges on the willingness of Asian central banks to both hold enormous amounts of US Treasuries (and other US fixed income securities) and to add to their already enormous stocks to provide the ongoing financial flows needed to sustain the U.S. current account deficit and the Bretton Woods Two system.
..................
Our analysis suggests that the Bretton Woods Two system is fragile, and likely will prove unstable. Even if the United States continues to maintain a privileged place in the international monetary system and thus remains able to borrow on terms that other, comparable, debtors could not imagine, our analysis suggests that the U.S. is on an unsustainable and dangerous path.
Eine ausgezeichnete Analyse von Nouriel Roubini und Brad Setser von der New York Universität, September 2004.
