Painful adjustment
The fact is that there is only one way in which the U.S. has ever resolved a significant current account deficit, and that has been for the U.S. to suffer a significant retrenchment in gross domestic investment. Even if we don't experience a deep recession, one thing is clear: U.S. gross domestic investment (some combination of housing investment and capital spending) is likely to show very disappointing growth in the years ahead.
To underscore this point, notice that there is a strong negative relationship between changes in the current account and changes in U.S. gross domestic investment. This is exactly what we would expect. Large increases in gross domestic investment are associated with large deteriorations in the current account. Large shortfalls in gross domestic investment are associated with narrowing deficits or increasing surpluses on current account.
Very simply, growing current account deficits are the way that the U.S. finances investment booms. At present, however, the current account deficit has grown so large that a further expansion in U.S. domestic investment is very unlikely, at least not one of much vigor.
At best, U.S. gross domestic investment is likely to grow slowly over the coming years, perhaps with further expansion in capital spending financed by an offsetting decline in housing investment. That way, U.S. savings would gradually grow enough to reduce our reliance on foreign capital inflows. In that sort of outcome, consumption and investment would gradually fall as a share of GDP (see the chart at top), while growth in gross domestic saving would catch up with the slowly growing amount of gross domestic investment (see middle chart).
At worst, the current account deficit will ultimately be adjusted through an investment-led downturn in the U.S. economy. That risk explodes, of course, if the flow of foreign savings into the U.S. slows abruptly. The primary sources of funding for the U.S. current account deficit are China and Japan, who have accumulated U.S. securities as a method of supporting the value of the U.S. dollar. So long as these governments remain willing to continually accumulate U.S. securities, the situation could remain stable for a while. Still, there's a lot of risk to that bet.
A final note regarding the November jobs report, Alan Abelson's comments from Barron's tidily sum up the situation: “Undaunted by having wildly overestimated the final number, the more imaginative Street soothsayers suddenly discovered that the best way to figure the real job number was to average the latest two months; October, of course, was a monster month for employment, virtually the only one this year. When December's report comes in, we've not a scintilla of doubt, they'll decide that to get a truly accurate job picture, you have to add the last two months.”
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3 comments:
I really don't understand this:
"Gross Domestic Investment = Private Saving + Government Saving + Foreign Saving
Stated another way, the entire expansion in U.S. gross domestic investment since the mid-1990's has been financed not by domestic saving, but by an import of foreign capital. There's your trouble."
This is a global economy. So what is the difference between domestic and foreign investment? When Honda builds a plant in Ohio, is that bad? I mean, don't we actually insist that they do that, as opposed to selling us the parts?
Unless being a banana republic is really a bad thing? But then, what would that say about this whole global trade business? And, gee, if corporations really have that much power over government and the corporations are foreign, then, ummm, yeah, that's a banana republic I guess.
Economically we can do just fine. If that's what life is all about, we'll do fine. And ultimately, does it matter if an English corporation trashed the mountains of West Virginia (which went for Bush) or a US corporation does it?
See, I think this global trade stuff is bullshit. Perot called it that great sucking sound. He meant jobs. I think it means the very air we breathe, the water, the ground, the culture, the blood.
It's the difference between being alive and being the culturing medium on which something that is alive grows on. Petri dish stuff.
The Economist has picked up this topic too. In fact, it is the theme of the latest issue. Also, the economist mentioned this study , which doesn't paint a pretty picture.
It is really confusing terminology: they say the US is not "saving". What they mean is the US citizen is spending all of his money consuming non durables, buying hamburgers, and never investing: in this capitalist society, we are averse to buying capital goods, ie, the means of production.
They call it "saving", but saving? that's really simple: it's called "not spending". What? You mean in order to save, I've got to (gulp) not spend??? But the president TOLD me to spend! To go to the mall and show the terrorists they can't stop us! If we don't spend, we'll all die!
Savings is exactly equal to the money we don't spend. How to save more? spend less. Stop the buying!
Buying, like borrowing, used to be from ourselves. But now it's from somebody else. Global trade really sucks, and it is making some people very very rich.
150 years ago, it was balanced on the backs of the slaves. Now we will willingly put it onto our own backs and think "nah, it's not going on my back!". Maybe not: but it IS going on someones back.
Am I wrong here?
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