Speech

How Dangerous Is the U.S. Current Account Deficit? EconomicPolicyLectureSeries LindenwoodUniversity St.Charles,Missouri November9,2005 The U.S. current account deficit has fiscalbalanceinthelongrun.Ibelievethecurrent attracted considerable attention from accountadjustmentwillbefairlyslowandorderly, academics, policymakers and market andthatitmaynotbeginforquitesometime. participants. So also has the U.S. inter- Myanswerisalsobasedonasimpleobserva- national investment position—the difference tion,whichIbelieveisnotwidelyunderstood. between U.S.-owned assets abroad and foreign- FortheUnitedStates,unlikealmosteveryother owned assets in the United States. The net posi- countryintheworld,ahard-landingprocessis tion has become increasingly negative as current inherentlyself-limiting.U.S.assetsownedby account deficits have accumulated over time. I internationalinvestorsarepredominantlydenom- havespokenoninternationaltopicsseveraltimes inatedindollars,andalargefractionofU.S. in recent years, emphasizing the importance of assetsheldabroadaredenominatedinforeign international capital flows for explaining the currencies.Dollardepreciation,shoulditoccur evolution of the U.S. international accounts. I’ll inahard-landingprocess,willbeself-limiting reviewsomeofmyprioranalysistoday,butwant becausethedollarvalueofU.S.assetsabroad to concentrate on the question in my title. willrise,thusimprovingtheU.S.netinterna- Thequestionarisesbecause,atsomepointin tionalinvestmentposition.Marketparticipants, thefuture,theworldeconomywilladjustinways knowingthisfact,arethereforeunlikelytodrive thatyieldasmallerU.S.currentaccountdeficit. downtheforeigncurrencyvalueofthedollarin Thatweknowforcertain,becauseasituationin arapidanddisruptivefashion. whichtheU.S.netinternationalinvestmentposi- I’llproceedintwosteps.First,I’llexplorethe tionbecomesevermorenegativeasapercentage fundamentalsoftheU.S.position,emphasizing ofGDPisinconsistentwithlong-runequilibrium. thecentralroleofinternationalcapitalflowsin So,thequestionisnotwhethertheU.S.current creatingthecurrentaccountdeficit.Second,I’ll accountdeficitwillfallinthefuturebutwhether developthethemethattheU.S.positionisself- theinevitableadjustmentislikelytobepainful correcting,shouldahard-landingprocessbegin. anddisruptiveofU.S.economicgrowthandsta- Beforeproceeding,Iwanttoemphasizethat bility—ahardlanding. theviewsIexpressherearemineanddonot Myansweristhatahardlandingisvery necessarilyreflectofficialpositionsoftheFederal unlikelyprovidedthatU.S.monetaryandfiscal ReserveSystem.TwomembersoftheSt.Louis authoritiesmaintainsoundpolicies.TheFederal Fed’sResearchDivision,CletusCoughlin,vice Reserveneedstopursuepoliciesthatyieldlow president,andMikePakko,senioreconomist, inflationandfinancialstability,andthefederal providedspecialassistance.However,Iretain governmentneedstopursuepoliciesthatyield fullresponsibilityforerrors. 1 INTERNATIONALTRADEANDFINANCE PRELIMINARIES RECENT TRENDS IN THE U.S. ThemostwidelycitedmeasureoftheU.S. INTERNATIONAL INVESTMENT externalimbalanceisthetradedeficit—thediffer- POSITION encebetweenU.S.exportsandimportsofgoods Thecapitalaccountmeasuresassetflowsof andservices.Moregenerally,itisusefultocon- acountryforagivenperiod,suchasayear.For siderthebroaderconceptofthecurrentaccount, theUnitedStates,thecapitalaccountincludes whichincludescurrentearningsoncapitalaswell theaccumulationofforeignassetsbyU.S.resi- astradeingoodsandservices.Acorresponding dentsaswellastheaccumulationofU.S.assets accountontheothersideoftheledger,knownas byforeigners. the“capitalandfinancialaccount,”measures theinternationalflowofcapitalassets.Putting Astradeandcommercearoundtheworld asideerrorsandomissionsinthedata,acurrent havegrownincreasinglyintegrated—theprocess accountdeficitisnecessarilyequaltoacapital oftenreferredtoas“globalization”—thegrowth accountsurplus.Acountryinthisposition— ofcross-borderfinancialflowshasbecomepar- liketheUnitedStatestoday—isexportingmore ticularlyprominent.Forexample,foreignowner- capitalclaimsthanitisimporting.Putanother shipofU.S.assetsincreasedbyanaverageof way,internationalinvestorsarebringingmore $155billionperyearduringthe1980s.Forthe capitaltotheUnitedStatesthanU.S.investors years2000through2004,foreignownershipof aresendingabroad. U.S.assetsincreasedatanaveragerateof$991 Acommonmistakeistotreatinternational billionperyear—morethanasix-foldincrease. capitalflowsasthoughtheyarepassivelyrespond- In2004,over$1.4trillionofU.S.assetswere ingtowhatishappeninginthecurrentaccount. purchasedbyforeignentities.1 Thecurrentaccountdeficit,somesay,isfinanced U.S.ownershipofforeignassetshasshown byU.S.borrowingabroad.Infact,international similargrowth.Averaging$95billionperyear investorsbuyU.S.assetsnotforthepurposeof duringthe1980s,U.S.entitieshaveaccumulated financingtheU.S.currentaccountdeficitbut foreignassetsatanaveragerateof$484billion becausetheybelievethesearesoundinvestments peryearoverthepastfiveyears.Overtheentire promisingagoodcombinationofsafetyand spanofthiscomparison,accumulationofU.S. return.Moreover,manyoftheseinvestments assetsbyinternationalinvestorshasoutpaced havenothingwhatsoevertodowithborrowing theU.S.accumulationofforeignassets—acapital intheconventionalmeaningoftheword,but accountsurplusthathasmovedourcountryfrom insteadinvolvepurchasesofland,businesses, apositivetoanegativenetassetposition. andcommonstockintheUnitedStates.Foreign Priorto1989,theUnitedStateshadhada autocompanies,forexample,havepurchased positivenetinternationalinvestmentposition landandbuiltmanufacturingplantsintheUnited sinceWorldWarI.Asaconsequenceoflarge States.Clearly,foreignautoproducershaveestab- capitalinflowsinthe1990s,theUnitedStates lishedthesefacilitiesbecauseoftheprospective returnsfrombuildingvehiclesintheUnited todayhastheworld’slargestnegativenetinter- Statesandnotforthepurposeoffinancingthe nationalinvestmentposition.Bytheendof2004, U.S.currentaccountdeficit.Thissimpleexample foreignersownedmorethan$12.5trillionofU.S. shouldmakeclearthatacarefulanalysisofthe assets,basedonmarketvalues,whileU.S.-owned natureofinternationalcapitalflowsisnecessary assetsabroadreachedalevelofjustunder$10 beforeofferingjudgmentsaboutrisksposedby trillion.Hence,attheendoflastyear,theU.S. theU.S.currentaccountdeficit. netinternationalinvestmentpositionwasminus 1 DataarefromtheBureauofEconomicAnalysis,asreportedintheU.S.InternationalInvestmentPositiontables.Directinvestmentismeas- uredatmarketvalue. 2 HowDangerousIstheU.S.CurrentAccountDeficit? $2.5trillion,amountingtoover20percentof exceedthoseabroad,thusencouragingcapital U.S.GDP. flowstotheUnitedStates. Intoday’sworld,withelectronicfundstrans- Asmanyhavecommented,thecapitalinflow fers,financialderivativesandlargelyunrestricted mayalsoreflectthelowsavingrateintheUnited capitalflows,investorshaveaglobalmarketplace States.However,theU.S.savingrateshouldnot inwhichtoseekprofitablereturnsanddiversify beviewedinisolation:BenBernanke—aformer risk.Insuchanenvironment,weshouldconsider FedGovernor,currentChairmanofthePresident’s thepossibilitythataggregatepatternsofinter- CouncilofEconomicAdvisorsandPresident nationaltradeflowsmaybetheby-productofa Bush’snomineetosucceedAlanGreenspanas processthroughwhichfinancialresourcesare FederalReserveChairman—haspersuasively arguedthatanunusuallyhighlevelofworldwide seekingtheirmostefficientallocationsinaworld- savingsrelativetoinvestmentopportunitieshas widecapitalmarket.Thatis,insteadofthinking resultedindownwardpressureonworldinterest thatcapitalflowsarefinancingthecurrentaccount rates.2Investorseverywhereseekthebestcombi- deficit,itmaywellbethatthetradedeficitis nationofinvestmentreturnandsecurity,andthey drivenby—isfinancing,sotospeak—capital havebroughtabundantcapitaltotheUnited flowsdeterminedbyinvestorsseekingthebest Statesbecausetheprofitabilityandsecurityof combinationofriskandreturnintheinternational U.S.investmentopportunitiesmaketheUnited capitalmarket.Themechanismcreatingthis Statessomethingofanoasisofprosperityand outcomeisthatcapitalinflowskeepthedollar stability. strongerthanitotherwisewouldbe,tendingto Someoftheseeconomicforcesmaytendto boostimportsandsuppressexports,thusleading reduceU.S.capitalinflowsinthefuture.For toacurrentaccountdeficit. example,asportfoliosbecomemoreinternation- Whiletheconclusionthatthecurrentaccount allydiversified,theincentiveforinvestors isfinancingthecapitalaccountissurelyanover- abroadtomovecapitaltotheUnitedStateswill statement,becausecapitalandtradeflowsare diminish.Agingpopulationsmayincreasepur- jointlydetermined,itisworthemphasizingthat chasesofU.S.goodswiththeiraccumulated capitalflowsareahighlydynamicfeatureofthe assets.Thenetoftheseeconomicforcesinthe worldeconomy.Capitalflowsaredrivenbya futuremaytendtoeitherappreciateordepreci- numberofeconomicforceswhicharenotfully atethevalueofthedollaronforeignexchange understood,especiallyataquantitativelevel.The markets. “homebias”ofinvestors,whichhasledthemto Butonethingisclear:Changesininvestor investintheirhomecountriesratherthanseek attitudesandexpectationscanaltercapitalflows optimalinternationaldiversification,hasproba- quicklyandforcechangesinthetradeaccount. blybeendiminishingand,asaconsequence, Fromthisperspective,whichIhavecalledthe investorseverywhereareincreasinglyinvesting “internationalcapitalmarketsview,”international outsidetheirhomecountries.Countrieswith assetmarketsplayacentralrole.Capitalflows, rapidlyagingpopulations,especiallyJapanand determinedbythemotivationsofforeignand WesternEuropeanones,maybesavingandinvest- domesticinvestors,areadrivingforce.Weshould ingintheUnitedStatesagainstthedaywhen thinkofcapitalflowsastheequilibriumoutcome theirpopulationswillbedrawingdownassetsto ofinvestorsworldwideseekingtoacquireport- supportretiredcitizens.BecausetheUnited foliosthatbalanceriskandreturnthrough Stateseconomyhasbeengrowingatafasterpace diversification. thanmosthigh-incomecounties,investment Whenwebearthisperspectiveinmind— returnsfromU.S.operationshavetendedto thatinternationalcapitalflowsaredetermined 2 Bernanke(2005). 3 INTERNATIONALTRADEANDFINANCE byinvestors’effortstoallocatetheircapitalmost indexhasreboundedbyabout6percentsofarin efficientlyandnotbypassivefinancingofthe 2005.Thedepreciation,onbalance,since2002 currentaccount—prospectsforapainfulcurrent hasmadeU.S.exportsmorecompetitiveandhas accountadjustmentinthefutureseemlesslikely. ledtosomepriceincreasesinU.S.imports.These Thefundamentaleconomicdeterminantsofcap- arethetypesofadjustmentsthattakeplacein italflowsareunlikelytochangequicklyand marketeconomiesinresponsetoevolvingsupply massively,andthereforecapitalflowsthemselves anddemandconditions.Therecentdepreciation areunlikelytochangequicklyandmassively. ofthedollarcanbeseenaspartofthenormal adjustmentprocessoftheeconomy,andmarkets havenotshownanysignsofbecomingdisorderly. A CONSIDERATION OF THE Anemphasisonsavingsandinvestmentas driversofinternationalcapitalflowsappears POTENTIAL DANGERS incompleteandnotcompletelyinaccordwith Thepotentialdangersofcurrentaccount recentfacts.Whatisneeded,Ibelieve,isamore adjustmentscanbeviewedfromanumberof explicitfocusontheuniqueroleofU.S.financial perspectives.Asweconsidersomeofthesesce- marketsintheworldeconomy. narios,theinternationalcapitalmarketsview willservetocountersomeoftheconcerns. Manyofthosewhopredictadverseconse- THE U.S. ROLE IN INTERNATIONAL quencesofacurrentaccountreversalemphasize CAPITAL MARKETS theriskofadramaticdepreciationofthedollar onforeignexchangemarkets.Ifthisdeclinewere Theglobalizationoffinancialmarkets— totakeplacesuddenly,resultingindisorderly spurredbytechnologicaladvancesandliberaliza- markets,afinancial-marketinducedrecession tionofcapitalflowrestrictionsworldwide—has mightensue.Toproperlyevaluatethelikelihood createdentirelynewinvestmentopportunities ofthiskindofworst-casescenario,weneedto forinvestorsinboththeUnitedStatesandabroad. considersomealternativeviewsoftheforces Thesenewopportunitieshaveundoubtedly drivingtheU.S.currentaccountdeficitinthe givenrisetoare-balancingofportfolios,and firstplace. therearereasonstobelievethatthisprocess Fromatradedeficitview,whichIdonot mightbeassociatedwithanetexportofclaims share,depreciationofthedollaronforeign onU.S.assets,yieldingacurrentaccountdeficit. exchangemarketsmightbeseenasnecessaryto U.S.financialmarketsareamongthemost resolvetheexcessofU.S.importsoverexports. highlydevelopedintheworld,offeringefficiency, Onthisview,eithertheUnitedStateswillruna transparencyandliquidity.TheU.S.dollarserves persistentlywideningcurrentaccountdeficit,or asbothamediumofexchangeandaunitof wearedestinedtofacesomecombinationofa accountinmanyinternationaltransactions. depreciatingcurrencyand/orlowerGDPgrowth. Thesefactorsmakedollar-denominatedclaims Ifwelookatthesituationfromtheoppositedirec- attractiveassetsinanyinternationalportfolio. tion,however,wemightnotethattherecenthis- Nocapitalmarketintheworldhasacombination toricaltrendofawideningU.S.currentaccount ofstrengthssuperiortothatoftheUnitedStates. deficithastakenplaceinanenvironmentinwhich Ouradvantagesincludethepromiseofagood U.S.GDPgrowthhasbeen,onaverage,higher return,safety,securepoliticalinstitutions,liquid- thangrowthinmuchoftherestoftheworld. ityandanenormousdepthoffinancialexpertise. Indeed,wedidseesomedepreciationofthe Forsomepurposes,itisusefultothinkofU.S. dollarfromearly2002through2004,byabit financialmarketsasservingasaworldfinancial lessthan30percentasmeasuredbythemajor- intermediary.Justasabank,oramutualfund, currenciestrade-weightedindex.However,the channelsthesavingsofmanyindividualstoward 4 HowDangerousIstheU.S.CurrentAccountDeficit? productiveinvestments,theU.S.financialmar- PartofthereasonU.S.capitalmarketshave ketsplayasimilarroleformanyinvestorsfrom unrivaledstrengthintheworldeconomyisthat aroundtheworld.Intheprocess,individuals, U.S.financialinstitutionsprovideservicesof companies,andgovernmentsaccumulatedollar- extremelyhighquality.Inthedetailedtrade denominatedassetstoserveasavehicleforfacil- accounts,weseethattheUnitedStateshasalop- itatingtransactionsandstoringliquidwealth sidedtradeadvantageinfinancialservices.In safely. 2004,U.S.exportsoffinancialservicesamounted Abankearnsitsreturnoncapitalbypaying to$21.9billion,againstimportsofsuchservices alowerinterestratetodepositorsthanitearns ofonly$5.0billion.Anotherlineinthetableof onitsassets.Similarly,theUnitedStatesearnsa tradestatisticstellsthesamestory:business, higherreturnonitsinvestmentsabroadthanfor- professionalandtechnicalservicesyieldedU.S. exportearningsin2004of$33.8billionasagainst eignersdoontheirinvestmentsintheUnited importsofsuchservices$12.5billion.Someof States.DespitethefactthattheU.S.international theseservices,suchaslegalandaccounting investmentpositionattheendof2004was–$2.5 services,arecloselyconnectedtosuccessin trillion,U.S.netincomein2004onitsinvest- financialservicestrade. mentsabroadslightlyexceededincomepayments onforeign-ownedassetsintheUnitedStates. Thispatternhasbeenthenormforanumberof HOW DANGEROUS IS THE U.S. yearsbut,obviously,thenetincomeflowwill CURRENT ACCOUNT DEFICIT? becomenegativeiftheU.S.netinternational investmentpositionbecomessufficientlynegative. Inlightoftheseconsiderations,letusreturn HowistheUnitedStatesabletoearnasig- toourquestion:HowdangerousistheU.S.cur- nificantlyhigherreturnonitsassetsabroadthan rentaccountdeficit?Thefirstthingtonoteis foreignersearnontheirassetsintheUnitedStates? thatmanyoftheeconomicforcesdrivingcapital Considercurrency,whichpaysazeroreturn.A flowsareverylongterm.Portfolioreallocations remarkablefactisthatabouthalfthetotalamount occurashomebiasdeclines,butoveryearsrather ofU.S.currencyoutstandingiscirculatingabroad. thanquarters.Firmsbuildoperationsinother Anotherfactisthatmuchoftheforeignholding countriesbasedonplansextendingmanyyears ofU.S.debtisintheformofTreasurybillsand inthefuture.Demographicdevelopmentsunfold overdecades.Whatmayappeartobeanimbal- otherdebtinstruments,whileU.S.residentshold ancefromashort-runperspectivemaymakeper- amuchlargershareoftheirassetsabroadinthe fectsenseoveralong-termhorizon. formofequities,thusearninganequitypremium. Totheextentthatadjustmentofthecurrent Moregenerally,manyprivateandgovern- accountwillinvolvechangesintheforeign mentalinvestorsabroadrelyontheU.S.capital exchangevalueofthedollar,itisquitelikely marketasthebestplacetoinvestinextremely thatsuchchangeswilltakeplacegraduallyover safeandhighlyliquidsecurities.Alongaspec- timeinorderlymarkets.Thereisnoinherent trumofsafetyandliquidity,theseassetsinclude reasonthatsuchchangeswouldleadtoafinancial currency,U.S.governmentobligations,agency marketcrisis;asastable,diversifiedandgrowing debt,andcorporatebonds.U.S.equitymarkets economy,theUnitedStatesisnotlikelytosuffer arealsohighlyliquid.TheUnitedStatesasa fromasuddenlackofconfidencebyinvestors. wholeearnsareturnfromprovidingthesesafe Ofcourse,sustainedconfidencedoesdependon andliquidinvestmentstotheworld.Thedesire soundeconomicpolicies,asIhavealready offoreignerstoholdU.S.Treasurysecuritiesisa emphasized. testamenttotheconfidencethattheworldhasin ItissometimessaidthattheUnitedStates thesafetyandsoundnessofourfinancialsystem. hasbecomea“netdebtor”nation,andthatthis 5 INTERNATIONALTRADEANDFINANCE situationincreasestheriskthatcurrencydepre- TheU.S.situationiscompletelydifferent.To ciationmightleadtofinancialcrisis.Indeed, theextentthattheforeignexchangevalueofthe withacurrentaccountdeficitamountingto6 dollardeclines,theeffectonthevaluesofU.S. percentofGDPandanegativenetinternational andforeignassetholdingsworksnotasanaccel- investmentpositionover20percentofGDP,some eratorofcrisis,butaspartofaself-correcting havedrawncomparisonswithcountriessuchas mechanism.Dollar-denominatedU.S.liabilities Argentina,Brazil,Mexicoandothercountries remainunchangedindomesticvalue,which meansthatdebtserviceindollarsandrelativeto thatattimeshaveexperiencedseverebalance- thesizeoftheU.S.economydoesnotchange. of-paymentscrises.Iconsiderithighlyunlikely Moreover,holdingsofU.S.investorsabroad, thatsuchacrisiswillbefalltheUnitedStates. abouttwo-thirdsofwhicharedenominatedin Theword“debtor”isextremelymisleading foreigncurrencies,appreciateindollarterms. inthiscontext,fortheU.S.assetsownedbyfor- ThecompositionoftheU.S.internationalinvest- eignersincludeequitiesandphysicalcapital mentaccount,therefore,contributestostability locatedintheUnitedStates,inadditiontobonds ratherthantoinstability. issuedbyU.S.entities.Moreover,thepartofthe Thesignificantquantitativeimportanceof U.S.internationalfinancialpositionthatisdebt, exchangeratechangesontheU.S.netinterna- bywhichImeanbondsandotherfixedclaims tionalinvestmentpositioncanbeillustratedby suchasbankloans,ispredominantlydenomi- examiningspecificperiodsinwhichthedollar natedindollars.Infact,about95percentof appreciatedordepreciated.Considertheyears internationalclaimsontheUnitedStatesare 2002-2004,duringwhichtheFed’smajorcurren- denominatedindollars.Acountrywithmostof ciestrade-weightedexchangerateindexdepreci- itsdebtdenominatedinitsowncurrencyisina atedbynearly27percent.Associatedwiththe verydifferentsituationfromonewhosedebtis currentaccountdeficitsduringthisperiodwere denominatedinothercurrencies.Thefamiliar financialflowsintotheUnitedStatestotaling crisesexperiencedbyseveralAsiancountriesin $1.6trillion.However,becauseforeignclaimson 1997-1998,byMexicoonseveraloccasions,and U.S.assetsaredenominatedindollarstoafar bynumerousothercountrieshaveallinvolved greaterextentthanU.S.claimsonforeignassets, situationsinwhichtheimpactedcountrieshave thedepreciationincreasedthedollarvalueofU.S. hadlargeexternaldebtsdenominatedinforeign assetsabroadrelativetoforeignassetsinthe currencies. UnitedStates.Thetotalvaluationimpactstem- Inthesepreviouscrisisscenarios,theforeign mingfromexchangeratechangeswas$919.0bil- denominationofdomesticdebthadimportant lion,whichwas57percentofthenetfinancial destabilizingconsequences.Considerwhattypi- flows.Forthisthree-yearperiod,theU.S.net callyhappenstoacountrysufferingabalance- internationalinvestmentpositiondecreasedby of-paymentscrisis.Astheforeignexchangevalue $202.8billion,butabsenttheexchangerate ofitscurrencydepreciates,thevalueofitsforeign adjustment,thepositionwouldhavedecreased liabilities—intermsofdomesticpurchasing bymorethan$1.1trillion. power—increases,asdoestheburdenofservicing Nowconsidertheyears1999-2001,toillus- itsinternationaldebt.Recognizingthisimplica- tratetheimpactofanappreciatingdollar.During tionofacrisis,internationalinvestorsrespond thisperiod,theFed’smajorcurrenciestrade- byparingbacktheirpositionsfurther,engender- weightedexchangerateindexshowedadollar ingevengreatercurrencydepreciation.Hence, appreciationofnearly15percent.Netfinancial thecombinationofforeign-denominateddebt flowsintotheUnitedStatestotaled$1.1trillion. andadepreciatingcurrencyhasproventobe Meanwhile,thetotalvaluationimpactofthe somethingofaviciouscircle—compounding appreciatingdollarwasanegative$548.2billion, andacceleratingacrisis. whichisnearlyhalfthesizeofthenetfinancial 6 HowDangerousIstheU.S.CurrentAccountDeficit? flows.Forthisthree-yearperiod,theU.S.net declinesingrowthduringtheadjustmentperiod, internationalinvestmentpositiondecreasedby cyclicalconsiderationsappearedtobeanimpor- $1.3trillion.Absenttheexchangerateadjustment, tantfactor.Moreover,thesecasesweregenerally thedecreasewouldhavebeen$684.4billion. notassociatedwithsignificantexchangerate However,thenegativeinternationalinvestment depreciations.Amongthosecaseswherecoun- positiondidnotthreatentocausedollardepreci- triesweatheredtheadjustmentwhileexperienc- ation;instead,causationwenttheotherway,as ingincreasingeconomicgrowth,exchangerate dollarappreciationcausedasignificantincrease adjustmentswereanimportantfactorinreducing inthenegativenetinvestmentposition. currentaccountdeficits—primarilybyraising Theeffectsofchangesintheforeignexchange exportgrowthratherthanloweringimports.In valueofthedollarontheU.S.netinternational thesecases,theexchangeratedepreciationevi- investmentpositionservetostabilizetheinter- dentlyplayedaroleinbufferingthoseeconomies nationalsectoroftheU.S.economy.Clearly,as againstadversegrowthconsequences. thepreviousillustrationsshow,itisamistaketo Thesefindingsprovidelittleevidencein ignorevaluationchangesbecausetheyarenot supportofthedisorderlymarketsscenarioand insignificantcomparedtotheannualfinancial areentirelyconsistentwiththeviewIhave flowsthatarethecounterpartofthecurrent emphasized.Tobesure,nocountrycanperma- accountdeficit. nentlyincurrisinglevelsofnetexternalobliga- Certainotherindustrializedeconomieshave tionsrelativetoGDP.Ifsustainedindefinitely, incurredmuchlargerexternalobligationsasa servicepaymentsonever-increasingobligations percentofGDPwithoutprecipitatingcrises.For wouldultimatelyexceednationalincome.Long example,Australia’snegativenetinvestment beforethatsituationofliteralinsolvencyoccurred, positionreached60percentofGDPinthemid- however,marketforceswoulddrivechangesin 1990s,Ireland’sexceeded70percentinthe1980s, exchangerates,interestratedifferentialsandrel- andNewZealandaccumulatedapositionamount- ativegrowthratesinsuchawaytomovethe ingtonearly90percentofGDPinthelate1990s. economytowardasustainablepath.Nevertheless, Notably,theseeconomieshaverecentlybeen suchadjustmentsneednotbesudden,largeor amongthemostsuccessful—intermsofeco- disruptiveastheyhavesometimesbeenforcoun- nomicgrowth—intheindustrializedworld.The trieswithseverebalance-of-paymentscrises. combinationofrisingexternalobligationsand Theinternationalcapitalmarketsviewsug- prospectsforrobustgrowthisentirelyconsistent geststhattheUnitedStatesismorelikethose withtheviewofthecapitalaccountIhavedis- countriesthathaveexperiencedhighlevelsof cussedtoday.Capitalflowstocountriesthatcan debtwithoutobviousilleffectsthanthosethat makeproductiveuseofit.Capitalinflowisa havesufferedcrises.Moreover,theU.S.caseis symptomofgoodgrowthprospectsandanaidto uniqueinanumberofrespects.Thecentralrole growthratherthananimpediment. ofU.S.financialmarkets—andofthedollar—in ArecentstudybyFederalReserveeconomists theworldeconomysuggeststhatcapitalaccount attheBoardofGovernorsbuttressesthisview.3 surpluses,andthereforecurrentaccountdeficits, Theauthorsofthestudy—Croke,Kamin,and arebeingdrivenprimarilybyforeigndemandfor Leduc—systematicallyexaminedexamplesof U.S.assetsratherthanbyanystructuralimbalance developedindustrialnationsthathaveexperi- intheU.S.economyitself. encedcurrentaccount“reversals.”Theyfound ThesituationfacingtheUnitedStatesis thatsuchreversalshavetypicallybeenbenign: deeplydifferentfromthatfacingnationsthat amongthosecountriesthatexperiencedthelargest haveexperiencedpainfulcurrentaccountadjust- 3 Croke,Kamin,andLeduc(2005). 7 INTERNATIONALTRADEANDFINANCE ments.ButwhiletheU.S.situationmightbequite matelytemporary,processthatmightresultina distinctive,itwouldbeamistaketothinkthat highernegativelevelofnetclaimswithoutnec- theUnitedStatesisincompletelyuncharted essarilyposinganythreattothelong-runsustain- waters;asnoted,otherprosperouscountries abilityoftheU.S.currentaccount.Norwillthe havehadlargenegativeinternationalinvestment transitiontoasustainablelong-runpathneces- positionswithoutgettingintotrouble,andthe sarilyrequirewrenchingadjustmentsindomestic UnitedStatesitselfwasinthispositionfor orinternationalmarketsorinexchangerates. decadespriortoWorldWarI. Wecanallbenefitfromourgoodfortunein havingaccesstoincreasinglysafe,liquidand transparentfinancialmarkets.TheUnitedStates CONCLUDING COMMENTS hascreatedforitselfacomparativeadvantagein capitalmarkets,andweshouldnotbesurprised Theinternationalfinancialmarketsviewof thatinvestorsallovertheworldcometobuythe U.S.internationalcapitalaccountdetermination product. thatIhavedescribedtodayhighlightsthedynamic roleofinternationalcapitaladjustmentsas investorsexploittheopportunitiesofglobalized REFERENCES financialmarkets.Becausethetechnological progressandcapital-marketliberalizationsthat Bernanke,BenS.“TheGlobalSavingGlutandthe havedriventhisprocesshaveevolvedovertime, U.S.CurrentAccountDeficit.”HomerJonesLecture, theprocesshasbeenprotracted.Ultimately,how- FederalReserveBankofSt.Louis,April14,2005. ever,whenportfolioadjustmentshaveoptimally exploitednewdiversificationopportunities,and Croke,Hilary;Kamin,StevenB.andLeduc,Sylvain. asgrowthabroadrises,thenetinternational “FinancialMarketDevelopmentsandEconomic ActivityduringCurrentAccountAdjustmentsin investmentpositionoftheUnitedStateswillsta- IndustrialEconomies.”InternationalFinance bilize.Soalso,overtime,willthecurrentaccount DiscussionPaperNumber827,BoardofGovernors deficitdeclinetosustainablelevels. oftheFederalReserveSystem,February2005. Ifthecapitalmarketsviewiscorrect—andI obviouslythinkitis—theforcesdrivingtheU.S. capitalaccountrepresentapersistent,butulti- 8

William Poole (2005, November 8). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20051109_poole

@misc{wtfs_speech_20051109_poole,
  author = {William Poole},
  title = {Speech},
  year = {2005},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20051109_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}