The United States and Her Creditors: Can the Symbiosis Last?

Abstract

The main arguments in this paper can be simply stated: • If output in the United States grows fast enough to keep unemployment constant between now and 2010, and if there is no further depreciation in the dollar, the deficit in the current account is likely to get worse, perhaps reaching 7.5 percent by the end of the decade. • If the trade deficit does not improve, let alone if it gets worse, the United States net foreign asset position will deteriorate greatly, so that, with interest rates rising, net income payments from abroad will at last turn negative, and the deficit in the current account as a whole could reach at least 8.5 percent of GDP. • Net saving (saving less investment) by the private sector is now (exceptionally) negative, to the tune of 2 percent of GDP, because of a spectacular increase in net lending to the personal sector. Our strong view is that, before the decade is out, the housing market will have peaked, a development that will check the growth in personal debt and reduce net lending. The resulting rise in personal saving will probably be enough to bring about some recovery in net saving by the private sector as a whole, increasing it from minus 2 percent to zero or even more. • If the current account deficit reaches 8.5 percent of GDP in the next five years, and if the private deficit rises to zero, it follows as a matter of accounting logic that the (general) government’s deficit must be increased from its present 4 percent of GDP to 8.5 percent, while public debt rises toward 150 percent of GDP in the long run. • If nothing happens to improve net export demand and if the U.S. government is unwilling to apply this huge fiscal stimulus, the U.S. economy will enter a period of stubborn deficiency in aggregate demand with serious disinflationary consequences at home and abroad. • If the dollar’s real rate of exchange were soon to fall by about 25 percent, adequate growth in the United States might be sustained, with declining deficits both in the budget and in the current account balance, so long as domestic demand was substantially curtailed by restrictive fiscal measures while overseas demand was increased by an accompanying fiscal expansion. But the real exchange rate has not moved decisively during the last seven years, and, so long as China and some other Asian countries continue to accumulate reserves on the same huge scale, it is unclear that the needed devaluation will occur. • Protection directed selectively against countries with large trade surpluses against the United States - China, in particular - would not solve the problem and would be a very retrograde step in terms of global trading arrangements. If there must be protection (which we are not recommending), the U.S. government might prefer to follow the principles laid down in the World Trade Organization’s (WTO) Article 12. • A resolution of the strategic problems now facing the U.S. and world economies can probably be achieved only via an international agreement that would change the international pattern of aggregate demand, combined with a change in relative prices. Together, these measures would ensure that trade is generally balanced at full employment. But there is no immediate pressure to bring such a change about because of the symbiosis to which our title refers. The short-term advantage of the present situation to the United States is that she is consuming 6 percent more goods and services than she produces, with high employment, low interest rates, and low inflation. The advantage to Japan and Europe is that their exports to the United States have helped fuel their mild aggregate demand growth, while China and other East Asian countries are building a mighty industrial machine by exporting growing quantities of manufactures and simultaneously accumulating a huge stock of liquid assets. This syndromebrings the word mercantilism to mind, with U.S. securities acting as the moderately equivalent of gold. Those hoping for a market solution may be chasing a mirage.