Posted on 09/23/2005 11:11:52 AM PDT by Reaganghost
An unbalanced world is getting caught up in the blame game. As the IMF and World Bank gather in Washington this weekend for their annual meeting, the risk of finger pointing is high. There are two sides to this increasingly contentious dispute: The United States is pinning the blame for its massive trade and current account deficits on the rest of the world -- bemoaning sluggish growth in Europe and Japan, along with unfair trading practices in China.
The rest of the world holds the saving-short US accountable for a disproportionate share of the global economy’s unprecedented imbalances. Where should the blame be placed?
Context is key in framing the answer to this question. In 2005, our estimates suggest that the US will account for fully 70% of all the current account deficits in the world economy (see my 16 September dispatch, Asymmetrical Risks of Global Rebalancing). That’s more than double America’s 28% share in world GDP as measured at market exchange rates and more than three times the US weight of 21% as gauged by the IMF’s purchasing-power parity metrics. By contrast, Japan’s surplus -- the world’s biggest -- accounts for only 17% of all the current account surpluses in the world.
In fact, it takes ten economies -- Japan, Germany, Russia, Saudi Arabia, China, Norway, Switzerland, Canada, Singapore, and the Netherlands -- to make up the same 70% share on the surplus side of the equation that America accounts for on the deficit side. In my view, there can be no mistaking the highly disproportionate share that America plays in fostering overall imbalances in the global economy.
But that still begs the key question of blame. Many continue to view America’s outsize deficits as simply a by-product of chronic growth and return deficiencies elsewhere in the world. That’s pretty much the party line in Washington these days. US politicians and policy makers argue that America
is doing the world a huge favor by playing the role as both a powerful engine of growth as well as a magnet for returned-starved capital. This has prompted Washington’s (and Wall Street’s) triumphalist explanation of global imbalances -- that the US capital account surplus is effectively driving the current account deficit. The other side of the debate is the tale of a saving-short US economy. With America’s net national saving rate hovering at a record low of 1.5% of GDP since early 2002 -- and likely to get considerably worse over the next 12-18 months -- the United States is putting enormous pressure on the rest of the world to fund its economic growth.
It is hard to be objective in sorting through the charges and counter-charges. Accusations leveled at one country or another quickly take on emotional overtones. But the facts, as noted above, are very clear on one thing: America’s current account deficit is the single largest imbalance in the world economy today. In my opinion, blame for this situation can best be assessed by assigning culpability to the major sources of America’s extraordinary saving shortfall:
Who is to blame for America’s negative personal saving rate? For its newfound asset-based saving strategies? For record levels of household sector indebtedness that are required to convert such saving into spendable purchasing power? In my view, the responsibility for these behavioral shifts rests solely on the back of the American consumer. It would be ludicrous to place the blame for the excesses of US consumerism on foreign economies. America’s record 71% consumption share of GDP over the past several years speaks for itself -- the highest portion of consumer demand ever recorded by a major developed economy. These trends are an outgrowth of conscious choices made by responsible adults. We have no one to blame except ourselves.
Who is to blame for open-ended federal budget deficits that have pushed government sector saving deeper and deeper into the red? For enacting multi-year tax cuts when private saving was at an all-time low? For embracing supply-side theories that presume such stimulus packages are self-financing? Blame for such fiscal recklessness can hardly be pinned on foreign economies. The Congress and the White House come together each year in setting the budget for the Federal government. The voting record on US fiscal choices speaks for itself.
Who is to blame for fostering a monetary policy that condones asset bubbles? For pushing the inflation-adjusted policy rate into negative territory for the longest period since the 1970s? At a time when most other major central banks -- the Bank of England, the Reserve Bank of Australia, the Bank of Japan, and even the ECB -- have raised serious questions about the relationship between asset markets and monetary policy, America’s Federal Reserve has been increasingly alone in resisting the trend.
To the extent investors and speculators draw comfort from a central bank that will not stand in the way of asset bubbles, excess in asset markets runs the risk of becoming self-fulfilling. Here, as well, the record speaks for itself -- two monstrous asset bubbles in the short span of only five years. And with those asset bubbles has come a nasty continuum -- asset-based saving, a sharp decline in income-based saving, and an ever-widening current account deficit. A Fed-induced asset economy is a breeding ground for global imbalances.
Finally, and very much related to the debate over imbalances, it is important to ask, Who is to blame for America’s large bilateral trade deficit with China? Washington politicians have left little doubt that they hold China directly accountable for this problem and for the related pressures it imposes on hard-pressed American workers. China-bashing is on the ascendancy and the risk of protectionist actions is far too high for comfort. America’s saving shortfall puts these issues in a very different context. Lacking in domestic saving, the US has consciously elected to import foreign saving in order to maintain rapid economic growth. To do that, it must run massive current account and trade deficits in order to attract the foreign capital. If Washington were to close down trade with China today, the US would still need to run a deficit -- it would simply have to be with someone else. The fact that the largest portion of America’s record trade deficit is with China is actually a good thing -- it provides US consumers with increased access to the world’s low-cost, high-quality producer. If America doesn’t want to run a trade deficit -- with China, or anyone else -- it needs to get its saving position in order.
In this case, at least some of the blame also needs to be shared by foreign monetary authorities. That’s especially the case of those in Asia who have led the charge in recycling their foreign exchange reserves into dollar-denominated assets. This has provided a subsidy to intermediate and longer-term US interest rates that has further fueled the excesses of the Asset Economy. However, had it not been for a Fed that was aggressive in anchoring the short end of the yield curve, there is good reason to believe that the foreign interest rate subsidy would have been less potent in providing support to US asset markets.
The issue of global imbalances will be at the top of the agenda at this year’s annual meetings of the IMF and World Bank.
There will undoubtedly be a good deal of finger pointing as to who is to blame for this increasingly precarious state of affairs. A growth-deficient Europe will face some tough questions -- especially in the aftermath of a political surprise in Germany that could well prove to be a serious setback for that nation’s long-overdue structural reform agenda. Growth-starved Japan will also be asked to accept its share of the blame -- although any such pressure could be tempered by recent improvement in the outlook for the Japanese economy. The heat will also be on China -- urging it to play by same rules as the rest of the world. And, for many of the reasons enumerated above, there will undoubtedly be considerable attention riveted on America’s role in fostering global imbalances.
Unfortunately, the answers to the rhetorical questions posed above are painfully obvious. America is to blame in shaping its own destiny. Sadly, that destiny is now manifested in the form of record excesses in the US economy. That’s true of the national saving rate, the current account deficit, household sector indebtedness, the consumption share of GDP, and the bubble-prone state of asset markets. As a result of these excesses, the US now accounts for fully 70% of the world’s imbalances -- well above any measure of its share in the global economy. Like it or not, the United States deserves a disproportionate share of the blame for global imbalances.
For financial markets, the implications are profound: The longer the world continues to play the blame game, the more the imbalances will build, and the greater the likelihood of a hard landing for the global economy and world financial markets. America’s failure to own up to its major role in fostering global imbalances is especially disturbing. By refusing to address its ever-mounting imbalances, the US flirts increasingly with a classic current account adjustment. That underscores downside risks to the US dollar and upside risks to real US interest rates. America’s lack of leadership in resolving global imbalances is hardly commensurate with its dominant position in the world econom
Democrats changed the Constitution and subverted the Constitution with a series of laws that are plainly unconstitutional. And Democrats made it effectively impossible to remove Supreme Court and lower federal court judges that modified the Constitution through judicial decrees.
When the United States comes to end in less than two decades, nobody will be to blame but the socialists in the Democratic Party.
Now, the only way I know of to raise the official savings rate is to raise interest rates sky-high.
But tahe would plung the US into a major recession, possibly even a depression, as all that credit card debt and adjustable rate mortgages force people into bankruptcy.
In other words, all the pain with no increase in net savings as a country. But our current account deficit would fall since many Americans would now be too poor to purchase imports.
Does everyone now understand why the US is telling other countries to boost their domestic demand rather than asking us to cut ours?
If you agree that the socialists are the problem, the solution is to get rid of the socialists in both parties. There is a way. Stay tuned. It is going to be unveiled in the days and weeks ahead on FreeRepublic.
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