The U.S. saving deficiency, current-account deficits, and deindustrialization: Implications for China

Abstract

In the United States, both private and governmental saving dropped sharply after 1980 in contrast to the preceding postwar decades. But investment in the America economy has held up quite well (except for the 2008 banking crisis) because of heavy borrowing from foreigners as manifested in the trade deficit. But what is cause and what is effect? The problem is that the Federal government faces an ultra soft borrowing constraint because of the dollar's central role in the international monetary system. Since 2002, Emerging Markets on the dollar standard's periphery have voluntarily bought—or being forced by hot money flows to buy—more than $6 trillion of foreign exchange reserves.But selling low-yield U.S. Treasury bonds to other industrial countries has hidden costs: (1) accelerated de-industrialization in U.S. manufacturing, and (2) the threat of a huge credit crunch should there be a worldwide loss of confidence in the dollar standard. With its stable dollar exchange rate, China—as America's largest creditor and largest trading partner—has a key role to play in avoiding (2) and mitigating (1).