The US as a Net Debtor: The Sustainability of the US External Imbalances Nouriel Roubini Stern School of Business, NYU and Brad Setser Research Associate, Global Economic Governance Programme, University College, Oxford First Draft: August 2004 This revised draft: November 2004
Executive Summary Recent headlines touting the latest upswing in the monthly trade deficit have underscored the size of the United States trade deficit. A trade deficit of around $420 billion in 2003 became a deficit of roughly $500 billion in 2003 and is on track to reach $600 billion in 2004. If oil prices stay high and U.S. growth does not falter, the trade deficit will be even larger in 2005 – likely well above $650 billion. Imports are currently growing slightly faster than exports. Yet even if imports grew at the same pace as exports, the large gap between the size of the U.S. import base and size of the U.S. export base would lead the U.S. trade balance to deteriorate. These trade deficits are large absolutely, large relative to U.S. GDP and large relative to the United States’ small export base. They imply an even larger deficit in the broader measure of the United States’ external balance, the current account1 and a rapid increase in the United States’ net external indebtedness. The U.S. trade deficit is the counterpart to low U.S. savings. In mid-late 1990s, the current account deficits reflected a combination of low private savings and strong private investment, not large budget deficits. The financial resources needed to support a surge in private investment were imported from abroad, allowing both consumption and investment to rise. Since 2001, however, the current account deficit has reflected a widening government deficit, not strong private investment. The U.S. now borrows from abroad to allow the government to run a large fiscal deficit without crowding out private investment, even as growing consumption (and necessarily, very low private savings) reduce the United States’ ability to finance the fiscal deficit and private investment domestically. No matter what their cause, the large ongoing deficits created when spending exceeds income have to be financed by borrowing from abroad (or by foreign direct investment or net foreign purchases of U.S. stocks). The broadest measure of the amount the United States owes the rest of the world – the net international investment position or NIIP – has gone from negative $360 billion in 1997 to negative $2.65 trillion in 2003. At the end of 2004, we estimate the net international position will be negative $3.3 trillion. Relative to GDP, net debt rose from 5% of GDP in 1997 to 24% of GDP at the end of 2003. It is likely to reach 28% of GDP by the end of 2004 and then keep on rising. Trends are no more encouraging when U.S. external debt is assessed in relation to U.S. export revenues. Exports as a share of GDP dipped a bit during the Asian crisis but then recovered and stood at 11% of GDP in 2001. But exports then slipped dramatically between 2001 and 2003, falling to a low of 9.5% of GDP in 2003 before starting to recover in 2004. Rising external debt and falling exports is never a good combination. At an estimated 280% of
The current account is the sum of the trade balance, the balance on labor income, the balance on international investment income and unilateral transfers (foreign aid and remittances).
exports at the end of 2004, the U.S. debt to export ratio is in shooting range of troubled Latin economies like Brazil and Argentina.2 A large, and rapidly growing, stock of external debt – the legacy of our past current account deficits - has not, to date, been much of a burden on the U.S. economy. The U.S. has had no difficulty adding to its external debt stock to finance ongoing current account deficits. Moreover, interest payments on existing external debt have not been much of a burden on the U.S. economy. The United States has lots of external assets as well as...
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