Speech

Does the United States Have a Current Account Deficit Disorder? BusinessandCommunityLeadersLuncheon TheLannomCenter Dyersburg,Tennessee April10,2001 Since the beginning of 1998, the U.S. andfinancialaccount.Second,andconsequently, current account balance has declined anunderstandingofchangesinthecapitaland sharply. In 2000, the current account financialaccountrequiresanunderstandingof deficit reached 4.4 percent of U.S. gross thereasonsforthelargefinancialflowstothe domesticproduct(GDP),whichhascausedmuch UnitedStatesinrecentyears.Third,Iwillexplore concern about the sustainability of this large whatmightcauseareversaloffinancialinflows deficit. Clearly, if this deficit is not sustainable, intotheUnitedStates.Fourth,Iwillexamine questions arise as to how the United States’ cur- evidencefromothercountriesthathaverunlarge rent account balance would return to levels that currentaccountdeficitstoseehowsuchevidence could be maintained. One specific question con- mightaddtoourunderstandingoftheU.S.situ- cerns the implications of a sudden reversal of ationtoday. investorsentimentaboutthedesirabilityofhold- Beforeproceeding,Iwanttoemphasizethat ing U.S. assets. Some commentators have raised theviewsIexpressherearemineanddonot the specter of a financial crisis with predictions necessarilyreflectofficialpositionsoftheFederal of capital flight, sharp declines in the foreign ReserveSystem.Thisspeechisajointproduct exchangevalueofthedollar,higherinterestrates, withCletusC.Coughlin,vicepresidentinthe and numerous bankruptcies and defaults. Such ResearchDivisionoftheFederalReserveBank a scenario could produce consequences for the ofSt.Louis;Igreatlyappreciatehisassistance. U.S. economy similar to those experienced by a However,Iretainfullresponsibilityforerrors. number of countries in East Asia during the late 1990s. Myremarksfocusonhowtointerpretrecent SOME BALANCE OF PAYMENTS developmentsintheU.S.currentaccount.Iplan ACCOUNTING toexaminefourrelatedtopics.First,Ithinksome oftheanalysisandcommentarydiscussingthe Priortodevelopingmykeypoints,I’lldiscuss U.S.currentaccountismisinformed.Usingsome afewconceptsfrombalanceofpaymentsaccount- terminologyfrombalanceofpaymentsaccounting, ingtobesureweareallonthesamewavelength. whichIwilldiscusslater,manycommentators Acountry’sbalanceofpaymentsisasystematic haveexpressedthemistakenviewthatthecapital accountofalltheexchangesofvaluebetween andfinancialaccount“finances”thecurrent residentsofthatcountryandtherestoftheworld account.Infact,fortheUnitedStates,changesin duringagivenperiodoftime.Formydiscussion thecapitalandfinancialaccounthavebeendriv- Iwillfocusontwoparticularaccountswithin ingchangesinthecurrentaccountformanyyears. thebalanceofpayments—thecurrentaccount Thatis,thecurrentaccount“finances”thecapital andthecapitalandfinancialaccount. 1 INTERNATIONALTRADEANDFINANCE TheU.S.currentaccountsummarizesall crucialtomyanalysis.Theaccountingbalance transactionsinvolvingflowsofgoods,services, measures,oraccountsfor,aneconomicequilib- income,andunilateraltransfersthattakeplace rium.ThesumtotalofallpurchasesofU.S.dol- betweenU.S.andforeignentities,whichinclude larsequalsthesumtotalofallsalesofU.S.dollars. privateindividuals,businesses,andgovernments. Purchasesandsalesaresimplytheoppositesides Thecurrentaccountbalanceissimplythediffer- ofthetransactionsinwhichdollarsaretraded encebetweenU.S.receiptsfromtherestofthe forgoods,services,andassets.Marketsreach worldandU.S.paymentstotherestoftheworld equilibriumthroughchangesinpricesofgoods, asaresultofthesetransactions.IfU.S.payments exchangerates,interestrates,andothervariables exceedreceipts,thentheU.S.issaidtoberunning thatdeterminethesuppliesanddemandsfor acurrentaccountdeficit.During2000,U.S.pay- goods,services,andassets.Theissueofthesus- mentsexceededreceiptsby$435billion. tainabilityoftheU.S.currentaccountdeficit— U.S.receiptsarisefromexportsofgoodsand oritscounterpart,thecapitalandfinancial services,interestanddividendsreceivedbyU.S. accountsurplus—is,then,theissueofthesus- ownersofforeignstocksandbonds,thereinvested tainabilityofthecombinationofprices,interest earningsoftheforeignaffiliatesofU.S.corpora- rates,exchangerates,andsoforththatgiverise tions,andgiftstotheUnitedStatesfromforeign tothecurrentaccountdeficit. residentsandgovernments.Conversely,U.S.pay- mentsresultfromimportsofgoodsandservices, interestanddividendsreceivedbyforeignowners INTERPRETING THE CURRENT ofU.S.stocksandbonds,thereinvestedearnings ACCOUNT ofU.S.affiliatesofforeigncorporations,andgifts fromtheUnitedStatestoforeignresidentsand Acommoninterpretationofthecurrent governments. accountisthatanincreasingcurrentaccount Thisdefinitionhighlightsanumberof deficitisbad.Onereasonforsuchaninterpreta- importantfacts.First,thereceiptsandpayments tionispsychological—wetendtoviewdeficits encompassmuchmorethanthemovementof asbadandsurplusesasgood.Thus,itisunder- merchandiseacrossnationalborders.Second, standablethatourinitialinstinctistoviewan thecurrentaccountreflectstheinteractionof increasingdeficitasbad.Thepossibleerrorof numerousdecisionsbyindividuals,firms,and thisviewisobvious:Ifthecurrentaccountdeficit governmentsbothintheUnitedStatesandabroad. isbad,soalsoisthecapitalandfinancialaccount Third,whenreceiptsexceedpayments,theUnited surplus. States,onnet,isacquiringassetsabroad.When Concernsaboutcurrentaccountdeficits, U.S.paymentsexceedreceipts,foreigners,on however,arenotstrictlypsychological.Several net,areacquiringassetsintheUnitedStates. economicargumentssuggestthatanincreasing WheneitherU.S.residentsacquireassets currentaccountdeficitcanbebad.Acommon abroadorforeignresidentsacquireassetsinthe argumentbeginsbynotingthattofinanceacurrent UnitedStates,thetransactionsarerecordedin accountdeficit,theUnitedStatesmustborrow thecapitalandfinancialaccountofthebalance fromabroad.Manyperceivetheaccumulationof ofpayments.Akeyaccountingidentityisthat indebtednesstoforeignersasaproblem.Infact, thecapitalandfinancialaccountbalancemust thecumulativeeffectofU.S.currentaccount beexactlytheoppositeofthecurrentaccount deficitshasmadethenetinternationalassetposi- balanceforanygivenperiodoftime.Inother tionoftheUnitedStatesthelargestsuchnegative words,acurrentaccountdeficitmustbematched positionintheworld. byacapitalandfinancialaccountsurplusand Someworrythatifforeignnationssuddenly viceversa.Thebalanceofpaymentsmustbalance! attemptedtoliquidatetheirassetsintheUnited Thereis,however,amoresubtlepointthatis States,theymightprecipitateafinancialcrisis 2 DoestheUnitedStatesHaveaCurrentAccountDeficitDisorder? here.Suchactions,however,areunlikelybecause claimsonassetsintheUnitedStates.Intermsof foreigninvestorswouldbedrivingdowntheir balanceofpaymentsaccounting,thesetransac- ownwealth.Othersareconcernedaboutthesus- tionswouldtendtoincreasetheU.S.capital tainabilityofsubstantiallevelsofborrowingfrom andfinancialaccountsurplus,which,inturn, abroad.Markets,however,willprovideclear meansthattheU.S.currentaccountdeficitwould signalsaboutsustainabilitybymeansofhigher increase. interestrates,lowerexchangerates,andreduced Animportantquestioniswhatwouldinduce creditavailability.Atthispoint,thereareno foreignresidentstoincreasetheirownershipof signalsindicatingsuchaproblem. assetsintheUnitedStates.Itisreasonabletothink Relatedtotheissueofsustainabilityisthe thattheseinvestorswouldbelookingatarateof factthatthedebtmustberepaid.Ifmostofthe return,adjustedforrisk,thatishighenoughrela- foreignfinancingisforcapitalgoods,suchasfac- tivetoinvestinginotherlocationsthatmakesthe toriesandequipment,thatwillallowforincreased UnitedStatesattractive.Itisclearthatinrecent U.S.productioninthefuture,thenforeigndebt yearstheUnitedStateshasbeenanattractive isnotnecessarilyaproblem.Iftheforeignfinanc- investmentlocation.Lowandstableinflation ingisforconsumptiongoods,however,itmay rates,rapidproductivitygrowth,andflexible beundesirablebecausefuturegenerationswill labormarketsareafewofthecharacteristicsthat beartheburdenofthedebt.Accordingly,there havemadetheUnitedStatesarapidlygrowing aresomereasonableargumentstosupportthe economyand,therefore,anappealinginvestment viewthatanincreasingcurrentaccountdeficit location. canbebad. Theprecedingdiscussionsuggeststhatwe cangainadeeperinsightintochangesintheU.S. currentaccountbyexaminingsavingandinvest- mentbehaviorbothhereandabroad.Ourtotal AN ALTERNATIVE VIEW investmentspendingasacountrymustbe Thereisanotherview,basedonanalyzing financedbyacombinationofdomesticandfor- currentaccountchangesfromadifferentperspec- eignsaving.Domesticsavingconsistsofprivate tive,thatsuggestsinthepresentcircumstances savingandgovernmentsaving.Untilrecently, thattheU.S.currentaccountdeficitisfarfrom government“saving”wasactuallydissaving bad.Thisviewstartsfromthepositionthatcapital becausegovernmentspendingexceededtaxrev- andfinancialaccounttransactionsinducechanges enue.Meanwhile,foreignsavingdirectedtothe inthecurrentaccount.Toemphasizethisalter- UnitedStatesisreflectedinthemagnitudeof nativeperspective,I’llnowfocusonthecapital ourcurrentaccountdeficit. andfinancialaccountsurplus.However,keepin Duringthe1980s,theUnitedStatesexperi- mindthatwheneverIrefertothe“capitaland encedrisingdeficitsinbothitscurrentaccount financialaccountsurplus”youcansubstitute andgovernmentbudgetbalances.Figure1shows “currentaccountdeficit”becausetheirdollar bothofthesebalancesrelativetoGDP.Itshows valuesareidenticalbytherulesofaccounting. thatthesetwindeficitsmovedintandeminsome Toillustrate:Assumethataforeignfirm years.Someeconomicanalystsarguedthatthe decidestobuildorexpandaproductionfacility federalbudgetdeficitwasdrivingthecurrent intheUnitedStates.Tworecentexamplesrelated account.Butthatargumentclearlybreaksdown toDyersburgareQuebecorWorld’spurchaseand duringthe1990s.Figure2showsthatthesebal- installationofaspecializedprintingpressforhigh- anceshavetendedtomoveinoppositedirections qualitymagazinesandcatalogsandNorthdown since1993.Moreover,basedonresearchby Industries’purchaseofabuildingthatwillbe PatriciaPollard,aneconomistattheFederal convertedtomanufacturecatlitter.Ineachof ReserveBankofSt.Louis,itisclearthatthetwin thesecases,foreignresidentsareincreasingtheir deficitphenomenonisnotahistoricalregularity 3 INTERNATIONALTRADEANDFINANCE Figure 1 U.S. Current Account and Government Budget Balances: 1980s (percent of GDP) NOTE:Quarterlydata.Labelsindicatefirstquarterofeachyear. Figure 2 Recent U.S. Current Account and Government Budget Balances (percent of GDP) NOTE:Quarterlydata.Labelsindicatefirstquarterofeachyear. 4 DoestheUnitedStatesHaveaCurrentAccountDeficitDisorder? Figure 3 U.S. Current Account Balance, Saving and Investment (percent of GDP) NOTE:Quarterlydata.Labelsindicatefirstquarterofeachyear. inmanyadvancedcountries.Shefoundthatthe stayedintherangeof1.0to1.5percentofGDP, changesinthesetwoaccountsareaslikelytobe asarisingnationalsavingrate,causedprimarily movinginoppositedirectionsasthesamedirec- bydecliningfederalbudgetdeficits,keptpace tion. withrisingdomesticinvestment.In1998,this Nowlet’sturnourattentiontosaving,both patternchanged:Investmentcontinuedtorise, privateandgovernment,andinvestment.The butsavingstagnatedandthenfellslightly. currentaccountdeficitincreasesifeithersaving Figure4illustratesanotherfactthatbolsters increaseslessthaninvestmentincreasesorif thecontentionthatanincreasingcurrentaccount savingdecreasesmorethaninvestmentdecreases. deficitisevidenceofastrongandhealthyecon- Generallyspeaking,savingandinvestmentare omy.Since1995,theforeignexchangevalueof bothdesirable.Savingfreesupresourcesthatcan thedollarhastrendedupward,asshownbythe beusedforinvestmenteitherhereorabroad.Gross solidlineinthechart.Ifthecurrentaccountwere privatedomesticinvestment,whichincludesthe drivingthecapitalaccount,thenaweakening purchasesofdurablegoods,suchasbusiness dollarwouldlikelyresult.Thisreasoningis equipment,isessentialforexpandingbothpro- straightforward.Acurrentaccountdeficitmeans ductivecapacityandproductivity.Suchexpan- thatthequantityofdollarsdemandedbyforeign sionpermitsmoreoutputtobeproducedinthe citizenstobuyU.S.goodsislessthanthequantity future. ofdollarssuppliedbyU.S.citizenstobuyforeign Figure3showsthattherisingcurrentaccount goods.Wemightexpectthatthisexcesssupply deficitinrecentyearshasbeenaccompaniedby ofdollarswouldputdownwardpressureonthe arisingrateofU.S.domesticinvestment.Between foreignexchangevalueofthedollar.Alternatively, 1993and1997,thecurrentaccountgenerally ifthecapitalandfinancialaccountisdrivingthe 5 INTERNATIONALTRADEANDFINANCE Figure 4 U.S. Current Account Balance and Real Trade Weighted Exchange Rate (percent of GDP) NOTE:Quarterlydata.Labelsindicatefirstquarterofeachyear. currentaccount,thenastrengtheningdollaris thepresentU.S.currentaccountwillshrink possible.Thereasonisthatthequantityofdollars remainstobeseen. demandedtomakeinvestmentsintheUnited Myinvestmentdiscussionmakesclear Statesrelativetothequantityofdollarssupplied anothercriticallyimportantpoint.Itismisleading tomakeinvestmentsabroadcanmorethanoffset torefertotheUnitedStatesasa“debtor”nation. theexcesssupplyofdollarsforcurrentaccount Asignificantshareofinternationalinvestment transactions.GiventheattractivenessofU.S. intheUnitedStatesisequityinvestment.Inter- assets,thedollarstrengthensasinternational nationalinvestorswhopurchasedsharesof investorsbuyU.S.assets. “dot-com”companiesdonothavetoberepaid. Infact,therelationshipbetweeninvestment Obviously,bothdomesticandinternational andthecurrentaccountfortheUnitedStates investorsbuyassetswiththeexpectationofade- appearstobeabroadempiricalregularity.Across quatereturns,butmaybedisappointedafterthe developedcountriesthathaveexperiencedlarge fact.Theimportantquestionisnotwhether currentdeficits,Pollardfindsthatthecurrent investmentsmadein1999willhavetoberepaid, accountdeficitsystematicallytendstoincrease butwhethertheU.S.investmentclimatethis asinvestmentrisesandtendstoshrinkasinvest- yearandinthefuturewillremainattractiveto mentdeclines. allinvestors,bothdomesticandinternational. Areturntosmallercurrentaccountdeficits Todate,myconclusioncontinuestobethat requiresariseinsavingand/orafallininvest- theU.S.investmentclimateremainsrobust,per- mentasashareofGDP.Bothofthesechanges hapssurprisinglysogiventheextentofthestock tookplaceduringthelate1980sintheUnited marketdecline.Weakernear-termprospectsseem States.Exactlywhenandhow,orevenwhether, nottohavedimmedthelong-runoutlookof 6 DoestheUnitedStatesHaveaCurrentAccountDeficitDisorder? robustgrowth.Moreover,thedollarremains Withrespecttomyownresponsibilities,one strongontheforeignexchangemarkets.Itdoes fundamentalthatIseeascrucialforahealthy notappeartomethattheU.S.capitalandfinan- U.S.economyisthecontrolofinflation.An cialaccountsurplusisabouttodeclinesharply. increasinginflationratecomplicatesthedecisions Andthatisgoodnewsratherthanbadnews. ofalleconomicactorsandraisesdoubtsabout therealreturnsonU.S.assets—oneoftheconse- quencesbeingthattheattractivenessofacquiring CONCLUDING COMMENTS andholdingU.S.assetsrelativetoforeignassets isreduced.Suchadevelopmentwouldcausethe Whatisclearfrommydiscussionisthatthe capitalandfinancialaccountsurplustodecrease capitalandfinancialaccountdrivesthecurrent and,thus,thecurrentaccountdeficitwouldalso account.ThelargeU.S.currentaccountdeficit decrease.Eventhoughsomemightviewsucha inrecentyearsistheresultofalargecapitaland changeinthecurrentaccountasdesirable,the financialaccountsurplus.Theseannualsurpluses keytoassessingthedesirabilityofsuchachange reflectahealthyandgrowingU.S.economythat hingesonthereasonforthechange.Risinginfla- hasprovidedanexcellentenvironmentforinvest- tionisnotadesirableeventconditionfortheU.S. ment.Asimilarcommentappliesmoregenerally economy. todevelopedeconomiesthathaveexperienced IhopetheperspectiveI’veofferedontheU.S. largecurrentaccountdeficits.Anexamination currentaccountdeficitisusefultoyou.Ifnothing oftheevidenceshowsthatincreasedgrosspri- else,rememberthatitmakesnosensetobecon- vatedomesticinvestmentissystematicallyasso- cernedaboutthatdeficitunlessyouarealsocon- ciatedwithincreasingcurrentaccountdeficits.If cernedaboutthecapitalaccountsurplus,because longer-runU.S.economicgrowthdeclines,then oneisanecessaryimplicationoftheother.Alit- itisreasonabletoexpecttheU.S.current tleaccountingcantakeusfarinthedirectionof accountdeficittoshrink.However,aslongas focusingontherealissuesandnotjustonthat thefundamentalsoftheU.S.economydonot scaryword“deficit”! deterioraterapidly,theprospectsofafinancial crisisareveryslim.Thus,myanswertothe questionposedinthetitleofthispresentationis thattheUnitedStatescertainlydoesnothavea currentaccountdeficitdisorder. 7

William Poole (2001, April 9). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20010410_poole

@misc{wtfs_speech_20010410_poole,
  author = {William Poole},
  title = {Speech},
  year = {2001},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20010410_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}