The other deficit

by John Quiggin on August 22, 2004

I was looking at the latest US trade figures from the Bureau of Economic Analysis and thought, rather unoriginally, that this is an unsustainable trend. Despite the decline in the value of the US dollar against most major currencies[1], the US balance of trade in goods and services hit a record deficit of $55 billion (annualised, this would be about 6 per cent of Gross Domestic Product) in June. The deficit has grown fairly steadily, and this trend shows no obvious signs of reversal, at least unless oil prices fall sharply.

This naturally, and still rather unoriginally, led me to the aphorism, attributed to Herbert Stein “If a trend can’t be sustained forever it won’t be”. Sustained large deficits on goods and services eventually imply unbounded growth in indebtedness, and exploding current account deficits[2], as compound interest works its magic. So, if the current account deficit is to be stabilised relative to GDP, trade in goods and services must sooner or later return to balance or (if the real interest rate is higher than the rate of economic growth) surplus

But forever is a long time. Before worrying about trends that can’t be sustained forever, it is worth thinking about how long they can be sustained, and what the adjustment process will be.

I set up a simple spreadsheet model and started with some reasonably optimistic numbers. Suppose the deficit on goods and services levels out at 5 per cent of GDP, stays at that level until 2007, and then declines steadily over the next decade years, with the balance stabilising at a surplus of 1.5 per cent of GDP. Over this period, net external obligations increase steadily, and so do the associated income payments. The equilibrium position has net obligations equal to around 80 per cent of GDP (about $8 trillion at current levels). Assuming an interest rate of around 7 per cent, the current account deficit stabilises at 4.5 per cent of GDP.

Would this be a sustainable outcome? Stephen Kirchner points to Australia to suggest that it is. After a big run of goods and services deficits in the 1980s, Australia’s position broadly stabilised in the 1990s, with net obligations around 60 per cent of GDP (still rising, but slowly), and a CAD of 4-5 per cent[3].

There are several problems with Kirchner’s claim. First, it’s not clear that complacency about Australia is justified. We weren’t affected by financial panic during the Asian crisis, but that doesn’t rule out the possibility that high debt levels will produce a panic sooner or later.

Second, as Peter Gallagher observes, the US is much bigger than Australia. It’s not clear that global capital markets can call forth enough savings to finance deficits on this scale, at least not without an increase in interest rates. Any significant increase in interest rates would create huge problems for debtor countries like Australia and the US.

But the biggest problem for me is that I can’t see how the stabilisation scenario I’ve described is going to be realised without some sort of crisis. Without radical changes in the US economy, a large deficit on oil imports can be taken as a given. And there are large classes of consumer goods for which domestic production has pretty much ceased. If balance is to be reached in a decade, there has to be a big turnaround in the pattern of trade somewhere, and it’s hard to see where. There is no sector in which the US is currently running a large surplus (there’s a small surplus on services, but even here, the trend is flat or negative). Even with the recent depreciation, and much-touted productivity growth, there’s no sign that US producers are gaining market share in any part of the traded goods sector. The big decline in manufacturing employment since the late 1990s is hard to square with the idea that short-term deficits are justified by long-term growth prospects.

Finally, the scenario requires a lot of faith on the part of foreign lenders, who face a big risk of expropriation through inflation or repudiation. At a minimum, you’d expect them to try to shift their lending to the US out of loans denominated in $US and into more secure currencies. (The $A-denominated share of Australian debt is 33 per cent and falling). This in turn would weaken the position of the US as a financial centre.

If a smooth, market-driven adjustment to a sustainable position is unlikely, what are the alternatives? Stay tuned for my next post, in which I will look at this question, and some of the proposals that have already been floated.

fn1. The exception is China. But Chinese inflation, which is accelerating, has the same real effect as a depreciation of the dollar against the Chinese yuan

fn2. The current account deficit is the sum of the deficit on goods and services (the trade deficit) and the deficit on income payments (the income deficit). At present, the US has a large trade deficit, but only a small income deficit.

fn3. Details in this report from the Parliamentary Library (PDF file). On the way to this balance, we went through a very nasty recession, largely driven by government policies aimed at bringing down the deficit. Although these policies were rightly criticised, and most economists now oppose using contractionary policy to target the CAD, it’s not clear that a market-driven adjustment would have been painless.

{ 18 comments }

1

kevin donoghue 08.22.04 at 2:01 pm

I look forward to your next post, but I am not persuaded by this one that “a smooth, market-driven adjustment to a sustainable position is unlikely.” The dollar slid spectacularly (after an equally spectacular rise) during the Reagan years. That didn’t weaken the position of the US as a financial centre, so why should a repeat performance do so? Even if it did, does it matter?

A weaker dollar would probably oblige America’s trading partners to make more of their own (and each others’) markets. Unlike smaller economies America can induce large changes in the behaviour of its trading partners through exchange rate changes.

It is probably true to say that the stabilisation cannot be accomplished without some sort of crisis. But a currency crisis doesn’t usually end with blood running in the streets, although it often seems that way to stressed-out traders.

The main reason for concern would be the difficult adjustments which developing countries might have to make, but there is no avoiding that.

2

abb1 08.22.04 at 2:46 pm

Chinese yuan is pegged to the US dollar at 8-something yuans for one dollar – fixed rate. Doesn’t this make US-China a single economy in a sense? This means that you have to subtract the US-China trade deficit (about $130b/year) from the total US trade deficit. That’s about a quarter.

What exactly long-term global consequences of this symbiosis might be is hard to figure; but it certainly not going to be pleasant for most of the US populaion.

Just a thought.

3

kevin donoghue 08.22.04 at 4:22 pm

abb1, the Chinese may be able to hold the nominal exchange rate fixed but they can’t fix the real exchange rate. John Quiggin’s small print draws attention to this: “Chinese inflation, which is accelerating, has the same real effect as a depreciation of the dollar against the Chinese yuan.”

Europe and Japan had to face this dilemma under the Bretton Woods system: keep your exchange rate constant and your exports to America soar, but so does your rate of inflation; or let your currency float and say goodbye to export-led growth. Even if you choose the first alternative the inflation eventually destroys your competitive advantage.

I agree that the US population has a nasty shock coming. It isn’t the exchange rate which is the root cause, but the fact that America spends more than it earns.

4

abb1 08.22.04 at 6:27 pm

Oh, sorry, I didn’t read the small print (the story of my life).

I am not sure I understand, though, this Chinese inflation thing. If yuan and dollar are the same and trade is pretty much unrestricted – how is it possible for China to have higher inflation than US for a considerable period of time?

OK, I found an article that says: “Inflation in China reached an eight-year high of 5 percent in June.” That’s June 2004. It doesn’t sound like a lot.

5

kevin donoghue 08.22.04 at 7:22 pm

What I know about the Chinese banking system would easily fit on a postcard, but for what it’s worth, the way to keep inflation going with a fixed exchange rate is: exporters receive lots of dollars which the central bank obligingly buys off them for yuan, putting lots more yuan into circulation. You don’t have to believe in monetarism (these days even Milton Friedman has his doubts) to accept that the eventual result is higher inflation, which gradually makes exports less competitive.

I don’t pretend to have much faith in this as a mechanism for eliminating trade imbalances, though. All sorts of other variables are likely to kick in, including an upsurge in protectionist sentiment in the US. That could be used to blackmail the Chinese into floating the yuan.

Of course it’s not a US/China issue, it’s a US/Rest-of-World issue. All sorts of scenarios are possible, many of them undeniably bleak, but it is surely too soon to rule out a fairly orderly adjustment with a weaker dollar and a sane US fiscal policy.

6

glory 08.22.04 at 7:22 pm

billmon wrote about this last year: http://billmon.org/archives/000233.html [arnold kling’s response]

it’s also worth mentioning the morgan stanley stable as been going back and forth on this all year as well. nouriel roubini has been keeping track; you can follow along here: http://www.stern.nyu.edu/globalmacro/cur_policy/cad.html

PIMCO’s paul mcculley i think has had the best defense, while the FT’s martin wolf* and recently bloomberg’s john berry have joined the deficit worrying bandwagon. ed yardeni also has some nice, fairly recent charts and stats (following on from “the kindness of strangers“) and finally brad delong’s take on america’s “exorbitant privilege.”

*see “America on the comfortable path to ruin,” “Asia’s game with America” and “We need a global currency”**

**see http://www.terratrc.org/ and http://www.bufferstock.org/

7

glory 08.22.04 at 8:42 pm

oh and uh my take (in that i find the whole process fairly fascinating :) is that inflation is the key insofar as it stress tests central banks’ ability to accumulae dollar reserves (sterilized or no). or as mcculley puts it:

…the global economy has massively unused and underutilized resources, particularly human resources. Accordingly, the world faces no danger whatsoever of corrosive inflation – too much money chasing too few goods. On the contrary, the dominant risk scenario in the global economy is too many goods chasing too few buyers.

As long as this is the dominant risk case, there is no rational limit to foreign central banks’ ability to buy dollars…

so to the extent that inflation pressures japan to end its zero interest rate policy (ZIRP) and/or china into a renminbi revaluation (float?), they’ll probably keep on purchasing treasuries if the dollar continues to weaken.

of course, the dollar could strengthen of its own accord (provided cont’d economic growth, employment and productivity come thru…), which would attract private capital inflows obviating the need for central bank intervention, thus lowering global inflationary pressures. so um, i guess it really does hinge upon how “massively unused and underutilized resources” really are.

it’s also worth noting that russian, indian, chinese and south korean central banks have all stated their intention to reduce their respective proportions of dollars in their forex reserves. euros makes the most sense as an alternate reserve currency (besides gold), but i know china has even looked at oil futures contracts given their fungibility.

i think it was joseph stiglitz who noted the structural mismatch of emerging market net capital flows to developed ones on an ongoing basis. it should be the other way around of course; understanding why it isn’t (mismanagement, corruption, etc.) i think’ll take you a long way in explaining the US C/A deficit.

recognizing this, it looks like foreign central banks are trying to redress this as much as they can thru monetary policy, but ultimately i think it takes a combination of a bunch of fiscal and microeconomic policy/reform.

finally! can’t remember where i saw it (maybe a US treasury ‘TICS‘ data study somewhere?) but taking into account transfer payments by foreign domiciled but US owned subsidiaries, the C/A deficit might actually be some 20% smaller than it is.

8

glory 08.22.04 at 8:50 pm

oh and i agree with kevin that having a “sane US fiscal policy” would help with any eventual ‘adjustment’ :D cheers!

9

self 08.22.04 at 9:04 pm

Thank you Prof. Quiggin for another compelling topic. Thanks also to glory for some useful links for added context.
It seems the issue of sustainability is at its core a game between central banks, as laid out in maclellan’s article. Could you expand on this in your second article ? I would be interested in your take on this as well as academic papers that impress you the most on this perspective of the CAD issue.

10

Max 08.23.04 at 1:52 am

A picture is worth a thousand words.

11

glory 08.23.04 at 3:41 pm

thanks self :D fwiw, i found that article on how the C/A deficit may be overstated; it was a BEA report on “An Ownership-Based Framework of the U.S. Current Account,” cheers!

12

Tom 08.23.04 at 7:49 pm

” But Chinese inflation, which is accelerating, has the same real effect as a depreciation of the dollar against the Chinese yuan”

Is this actually the case? Looking at Chinese CPI, it seemed to be stable relative to 10-odd years ago, when it was running ~10%.

13

John Quiggin 08.23.04 at 9:13 pm

Glory, thanks for the links. If I’m reading the last one correctly, though, it doesn’t actually change the Current Account Deficit. Rather it reclassifies some net positives on the income account into the goods and services account.

The effect is a smaller goods and services deficit with a larger income deficit.

14

glory 08.23.04 at 9:16 pm

UPDATE: last friday treas sec’y snow sed:

Other countries buy our debt because America has the deepest, most liquid debt markets in the world, the best capital markets in the world. They do it, frankly, not because they love us but because they get a good return on it… People believe in the dollar. It’s a tribute to the United States that people want to hold our currency.

roach today sez:

Shifts in the mix of foreign inflows between private and official sources is key to understanding the financing of America’s external deficits. Typically, private investors account for the bulk of foreign purchases of US securities. Over the 1985 to 2003 period, the private share of total net inflows averaged 86% — putting the official-share norm at 14%. The motives of these two classes of investors is, of course, very different. The private sector seeks return, whereas official flows are often driven by policy considerations — especially those that bear on foreign exchange rates. If a nation wishes to prevent its currency from rising (or falling) against the dollar, it will use official purchases (or sales) of dollar-denominated assets to compensate for any countervailing swings from private investors.

[…] Private investors accounted for the bulk of the June rebound, with fully 44% of the pick-up concentrated in a swing of flows back into equities after three months of net selling. While official net inflows of foreign central banks and other monetary authorities picked up a bit in June, the $16.4 billion average over the May-June period fell short of the $29.4 billion monthly pace recorded over the first four months of this year.

so it looks like private investors are at least beginning to pick up where foreign central banks are leaving off, which i guess sorta validates my contention that economic expansion “would attract private capital inflows obviating the need for central bank intervention…” would that it continues! alas, roach doesn’t think it will, altho he curiously relates the present situation with 1987…

There is a worrisome precedent for this shifting mix of foreign capital inflows from private to official funding. The last time it happened in the context of a US current account problem was in the months leading up to the stock market crash in October 1987. During the pre-crash period, private foreign buying of US securities started to falter as America’s external adjustment put further downward pressure on the dollar.

…after he just acknowledged that private foreign buying of US securities seemed to be picking up, at least according to the latest june TICS data. so i dunno; it’s something to watch anyway :D

in conclusion (and perhaps helpful for john quiggin’s next post, which i eagerly await :) here’s roach’s take on a non-smooth, ‘market-driven adjustment adjustment’ scenario:

So what’s the flashpoint that might trigger such a market response? Macro can’t provide what will undoubtedly be an event-driven response to this question. But it can be very helpful in laying out the forces that point to the endgame and the pressures that might spark it. Yes, there can be no mistaking the motives of self-interest, as outlined above, that continue to drive the official foreign funding of America. But, in the same sense, there can also be no mistaking the saturation of official holdings of dollar-denominated assets — a condition that has created a huge dollar overhang that is increasingly ripe for a correction. As of year-end 2003, BIS data reveal that dollar-denominated assets made up about 70% of the world’s total official holdings of foreign exchange reserve — more than double America’s 30% share of world GDP. With Asia accounting for more than 80% of total FX reserves in the world, there can be little doubt as to who is driving the official foreign demand for US securities. The Reserve Bank of India estimates that Asian central banks are now financing about 3-3.5% of America’s current account deficit (see the paper by Deputy Governor Rakesh Mohan, “Challenges to Monetary Policy in a Globalising Context,” in the January 2004 issue of the Reserve Bank of India Bulletin). Moreover, in keeping with my concerns expressed above, the BIS has also warned of the ominous precedent of 1987 (see Chapter V of the 74th Annual Report of the BIS, June 2004). While it is less worried about the shifting mix of foreign dollar buying than I am, the BIS expresses concern that the recent sharp build-up in dollar reserves is very reminiscent of the tough interplay between the dollar and the US current account deficit that contributed to the Crash of 1987.

With their massive overweight in dollars, it is not difficult to conceive of conditions that would arrest open-ended purchases of US securities by Asian officials. My top candidates: One, Asian reserve accumulation could slacken as its trade surpluses narrow or swing into deficit; such a shift is now under way in China. Two, Asia’s surplus saving could be absorbed by recoveries in domestic demand; Japan is the leading candidate in that regard. Three, US politicians could up the ante on protectionist actions against countries such as China and India; those nations could then reciprocate simply by not showing up at the next Treasury auction. Four, renewed recession in the US could prompt a private investor flight out of dollar-based assets that official purchases will not be able to offset. In my view, there is good reason to challenge the presumption that open-ended official foreign buying of dollar-denominated assets will continue in perpetuity. Our currency team argues that such inflows could well be poised to slow as early as the second half of this year (see “USD: Gearing Up for Rebalancing” in the August 19 issue of FX Pulse).

cheers!

15

glory 08.23.04 at 9:59 pm

thanks, i wasn’t sure how to read it either; i kinda thought it was a a way to reconcile ‘GDP’ with ‘GNP’ so i thought it was okay to just take $93.4bn divided by $418.0bn (22.3%) as a rough estimate of what today’s C/A deficit might be ‘overstated’ by.* but you know more than i do! (or can at least ask someone who knows; i can only post here :)

btw, last friday treas sec’y snow sed:

Other countries buy our debt because America has the deepest, most liquid debt markets in the world, the best capital markets in the world. They do it, frankly, not because they love us but because they get a good return on it… People believe in the dollar. It’s a tribute to the United States that people want to hold our currency.

while roach today sez:

Shifts in the mix of foreign inflows between private and official sources is key to understanding the financing of America’s external deficits. Typically, private investors account for the bulk of foreign purchases of US securities. Over the 1985 to 2003 period, the private share of total net inflows averaged 86% — putting the official-share norm at 14%. The motives of these two classes of investors is, of course, very different. The private sector seeks return, whereas official flows are often driven by policy considerations — especially those that bear on foreign exchange rates. If a nation wishes to prevent its currency from rising (or falling) against the dollar, it will use official purchases (or sales) of dollar-denominated assets to compensate for any countervailing swings from private investors.

[…] Private investors accounted for the bulk of the June rebound, with fully 44% of the pick-up concentrated in a swing of flows back into equities after three months of net selling. While official net inflows of foreign central banks and other monetary authorities picked up a bit in June, the $16.4 billion average over the May-June period fell short of the $29.4 billion monthly pace recorded over the first four months of this year.

so it looks like private investors are at least beginning to pick up where foreign central banks are leaving off, which i guess sorta validates my contention that economic expansion “would attract private capital inflows obviating the need for central bank intervention…” would that it continues! alas, roach doesn’t think it will, altho he curiously relates the present situation with 1987…

There is a worrisome precedent for this shifting mix of foreign capital inflows from private to official funding. The last time it happened in the context of a US current account problem was in the months leading up to the stock market crash in October 1987. During the pre-crash period, private foreign buying of US securities started to falter as America’s external adjustment put further downward pressure on the dollar.

…after he just acknowledged that private foreign buying of US securities seemed to be picking up, at least according to the latest june TICS data. so i dunno; it’s something to watch anyway :D

in conclusion (and perhaps helpful for john quiggin’s next post, which i eagerly await :) here’s roach’s take on a non-smooth, ‘market-driven adjustment adjustment’ scenario:

So what’s the flashpoint that might trigger such a market response? Macro can’t provide what will undoubtedly be an event-driven response to this question. But it can be very helpful in laying out the forces that point to the endgame and the pressures that might spark it. Yes, there can be no mistaking the motives of self-interest, as outlined above, that continue to drive the official foreign funding of America. But, in the same sense, there can also be no mistaking the saturation of official holdings of dollar-denominated assets — a condition that has created a huge dollar overhang that is increasingly ripe for a correction. As of year-end 2003, BIS data reveal that dollar-denominated assets made up about 70% of the world’s total official holdings of foreign exchange reserve — more than double America’s 30% share of world GDP. With Asia accounting for more than 80% of total FX reserves in the world, there can be little doubt as to who is driving the official foreign demand for US securities. The Reserve Bank of India estimates that Asian central banks are now financing about 3-3.5% of America’s current account deficit (see the paper by Deputy Governor Rakesh Mohan, “Challenges to Monetary Policy in a Globalising Context,” in the January 2004 issue of the Reserve Bank of India Bulletin). Moreover, in keeping with my concerns expressed above, the BIS has also warned of the ominous precedent of 1987 (see Chapter V of the 74th Annual Report of the BIS, June 2004). While it is less worried about the shifting mix of foreign dollar buying than I am, the BIS expresses concern that the recent sharp build-up in dollar reserves is very reminiscent of the tough interplay between the dollar and the US current account deficit that contributed to the Crash of 1987.

With their massive overweight in dollars, it is not difficult to conceive of conditions that would arrest open-ended purchases of US securities by Asian officials. My top candidates: One, Asian reserve accumulation could slacken as its trade surpluses narrow or swing into deficit; such a shift is now under way in China. Two, Asia’s surplus saving could be absorbed by recoveries in domestic demand; Japan is the leading candidate in that regard. Three, US politicians could up the ante on protectionist actions against countries such as China and India; those nations could then reciprocate simply by not showing up at the next Treasury auction. Four, renewed recession in the US could prompt a private investor flight out of dollar-based assets that official purchases will not be able to offset. In my view, there is good reason to challenge the presumption that open-ended official foreign buying of dollar-denominated assets will continue in perpetuity. Our currency team argues that such inflows could well be poised to slow as early as the second half of this year (see “USD: Gearing Up for Rebalancing” in the August 19 issue of FX Pulse).

cheers!

——
*since “This [ownership-based] deficit was $93.4 billion less than the $418.0 billion deficit on trade in goods and services in the conventional international accounts framework that is based solely on the location of production.” also, it goes on to discuss how this might be considered an “implicit management fee,” which i think is is a neat way to look at it.

16

glory 08.23.04 at 10:07 pm

thanks, i wasn’t sure how to read it either; i kinda thought it was a a way to reconcile ‘GDP’ with ‘GNP’ so i thought it was okay to just take $93.4bn divided by $418.0bn (22.3%) as a rough estimate of what today’s C/A deficit might be ‘overstated’ by.* but you know more than i do! (or can at least ask someone who knows; i can only post here :)

btw, last friday treas sec’y snow sed:

Other countries buy our debt because America has the deepest, most liquid debt markets in the world, the best capital markets in the world. They do it, frankly, not because they love us but because they get a good return on it… People believe in the dollar. It’s a tribute to the United States that people want to hold our currency.

while roach today sez:

Shifts in the mix of foreign inflows between private and official sources is key to understanding the financing of America’s external deficits. Typically, private investors account for the bulk of foreign purchases of US securities. Over the 1985 to 2003 period, the private share of total net inflows averaged 86% — putting the official-share norm at 14%. The motives of these two classes of investors is, of course, very different. The private sector seeks return, whereas official flows are often driven by policy considerations — especially those that bear on foreign exchange rates. If a nation wishes to prevent its currency from rising (or falling) against the dollar, it will use official purchases (or sales) of dollar-denominated assets to compensate for any countervailing swings from private investors.

[…] Private investors accounted for the bulk of the June rebound, with fully 44% of the pick-up concentrated in a swing of flows back into equities after three months of net selling. While official net inflows of foreign central banks and other monetary authorities picked up a bit in June, the $16.4 billion average over the May-June period fell short of the $29.4 billion monthly pace recorded over the first four months of this year.

so it looks like private investors are at least beginning to pick up where foreign central banks are leaving off, which i guess sorta validates my contention that economic expansion “would attract private capital inflows obviating the need for central bank intervention…” would that it continues! alas, roach doesn’t think it will, altho he curiously relates the present situation with 1987…

There is a worrisome precedent for this shifting mix of foreign capital inflows from private to official funding. The last time it happened in the context of a US current account problem was in the months leading up to the stock market crash in October 1987. During the pre-crash period, private foreign buying of US securities started to falter as America’s external adjustment put further downward pressure on the dollar.

…after he just acknowledged that private foreign buying of US securities seemed to be picking up, at least according to the latest june TICS data. so i dunno; it’s something to watch anyway :D

in conclusion (and perhaps helpful for john quiggin’s next post, which i eagerly await :) here’s roach’s take on a non-smooth, ‘market-driven adjustment adjustment’ scenario:

So what’s the flashpoint that might trigger such a market response? Macro can’t provide what will undoubtedly be an event-driven response to this question. But it can be very helpful in laying out the forces that point to the endgame and the pressures that might spark it. Yes, there can be no mistaking the motives of self-interest, as outlined above, that continue to drive the official foreign funding of America. But, in the same sense, there can also be no mistaking the saturation of official holdings of dollar-denominated assets — a condition that has created a huge dollar overhang that is increasingly ripe for a correction. As of year-end 2003, BIS data reveal that dollar-denominated assets made up about 70% of the world’s total official holdings of foreign exchange reserve — more than double America’s 30% share of world GDP. With Asia accounting for more than 80% of total FX reserves in the world, there can be little doubt as to who is driving the official foreign demand for US securities. The Reserve Bank of India estimates that Asian central banks are now financing about 3-3.5% of America’s current account deficit (see the paper by Deputy Governor Rakesh Mohan, “Challenges to Monetary Policy in a Globalising Context,” in the January 2004 issue of the Reserve Bank of India Bulletin). Moreover, in keeping with my concerns expressed above, the BIS has also warned of the ominous precedent of 1987 (see Chapter V of the 74th Annual Report of the BIS, June 2004). While it is less worried about the shifting mix of foreign dollar buying than I am, the BIS expresses concern that the recent sharp build-up in dollar reserves is very reminiscent of the tough interplay between the dollar and the US current account deficit that contributed to the Crash of 1987.

With their massive overweight in dollars, it is not difficult to conceive of conditions that would arrest open-ended purchases of US securities by Asian officials. My top candidates: One, Asian reserve accumulation could slacken as its trade surpluses narrow or swing into deficit; such a shift is now under way in China. Two, Asia’s surplus saving could be absorbed by recoveries in domestic demand; Japan is the leading candidate in that regard. Three, US politicians could up the ante on protectionist actions against countries such as China and India; those nations could then reciprocate simply by not showing up at the next Treasury auction. Four, renewed recession in the US could prompt a private investor flight out of dollar-based assets that official purchases will not be able to offset. In my view, there is good reason to challenge the presumption that open-ended official foreign buying of dollar-denominated assets will continue in perpetuity. Our currency team argues that such inflows could well be poised to slow as early as the second half of this year (see “USD: Gearing Up for Rebalancing” in the August 19 issue of FX Pulse).

cheers!

——
*since “This [ownership-based] deficit was $93.4 billion less than the $418.0 billion deficit on trade in goods and services in the conventional international accounts framework that is based solely on the location of production.” also, it goes on to discuss how this might be considered an “implicit management fee,” which i think is is a neat way to look at it.

17

glory 08.23.04 at 10:11 pm

awwww, oops :D sorry!

18

self 08.25.04 at 1:39 am

btw, the glory link I referred to is a Paul McCulley article (not MacClellan, “derrrrr”).

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