Rethinking the evils of current account deficits
Ross Gittins is Rethinking the evils of current account deficits and concludes that the source of the problem of the USA's growing current account deficit is with the PRC:
So the problem is the Asians have been saving more than they want to invest, leaving a surplus that has to be invested somewhere else in the world. Had the Americans not been willing to take those capital inflows - and use them to make up for their dearth of saving relative to investment - the world economy would have been much weaker than it was. Indeed, it would have been in recession.
So that's the "glut of savings" argument. Now, you may object that it's a terribly convenient argument for the free-spending Yanks to be running.
That's obviously true. But, as Mr Macfarlane has argued, it actually fits all the facts better than the story that blames the global imbalance on the US. In particular, it explains why US and world long-term interest rates are so low at present.
If the Americans are having to attract from a reluctant world all the funds needed to finance their big deficits, how come their currency is still quite strong and their long-term interest rates so low?
If the quantity of loanable funds demanded has been rising, how can the price of those funds (long-term interest rates) have been falling? The obvious answer is that the supply curve must have shifted out to the right.
That is, there must have been an increase in the global supply of loanable funds. And there was. For their own reasons, the Asians decided to cut their investment relative to their (amazingly strong) saving.
So, contrary to conventional thinking, the source of the global imbalance is Asia, not America.
The Economist is more pessimistic about this imbalance when they examine the Rebalancing Act (Subscription or purchase required - see 24 Septemebr 2005 Issue, pp.23-24, 'A Survey of the World Economy'):
IF THE first step towards finding a solution is to agree on the problem, the world's policymakers are still a long way from solving the global imbalances. European politicians blame American profligacy, urging Mr Bush's government to cut its budget deficit. Chinese politicians echo those sentiments.
Yet for American lawmakers on Capitol Hill, there is only one villian: China and its undervalued currency. The analysis in the White House is more sophisticated, but still tends to [former US Reserve Bank governor] Mr. [Ben] Bernanke's view that America's current account deficit is not "made in the USA".
The main problem is that:
More important, America's easy access to cheap money is pushing the economy in the wrong direction. Most of the foreign money is going into consumption and housing rather than boosting investment in productive American assets. Building houses does not raise long-term economic growth in the way that equipping a factory does. And the current rate of consumption, fuelled by housing wealth, leaves many indebted consumers at risk. The world as a whole may have savings to spare, but many Americans do not.
Emphasis Mine
And the article concludes that:
... the present [US] deficit is excessive and dangerous. Left alone, it could end in a global recesion, rampant protectionism, and even a disastrous financial crash. That is why policymakers need to act soon. With his "savings glut" speech, Mr. Bernanke focused attention on the scale of the global thrift shift. Now, as one of Mr. Bush's top economic advisors, he should persuade his boss of the importance of making the thrift shift safe.
And speaking of the US Real Estate market, I picked up the following article via Too much debt and too few brains about I'm Tom Barrack and I'm Getting Out . The world's best real estate investor has made billions in the U.S. market. Now he's cashing out and buying overseas.
Today Barrack sees signs of the tech bubble mentality in the U.S. real estate market. Too much capital is chasing real estate, he complains, with hedge funds, private-equity groups, and rich investors all bidding up the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5% or 6%," says Barrack. "That's too low." And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend that few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 30% in the past nine months," he says. The reasons: shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.
In other words, Ross Gittins is talking through his hat. The US ecoonomy is completely stuffed.
My previous posts on this subject were:
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