NS3040 Winter Term 2015

U.S. Current Account Balance

U.S. Current Account I

• Jeffrey Frankel, America the Balanced, Project Syndicate, October 20, 2014

• Starting in 1982 the prediction has been for large U.S. current account deficits due to:

• Budget deficits

• Low national savings rate and

• Overvalued dollar

• Officially the current account has been in deficit for more than three decades

• Question is whether this is a problem.

• In 2008 when the global financial crisis hit, investors flooded into dollar assets even though crisis originated in the U.S.

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U.S. Current Account II

• Also a substantial amount of U.S. adjustment has taken place since 1982

• Dollar depreciations of 1985-87 and 2002-2007 and

• Fiscal retrenchments of 1992-2000 and 2009-2014

• Big increase in domestic production of shale oil and gas has helped the trade balance recently

• As a result the US current account deficit in 2013 had

• Narrowed by half in dollar terms from 2006 peak and

• From 5.8% of GDP to 2.4%

• In addition a systematic adjustment has also occurred in China via

• Real appreciation of its currency

• Higher prices for labor and land3

U.S. Current Account III

• China’s current account surplus peaked in 2008 at more than 10% of GDP

• By 2013 it had narrowed to 1.9%

• China’s trade adjustment in some respects followed that of Japan – original focus of American trade anxieties in the 1980s

• Frankel proposes a more speculative reason why it is time to stop worrying about the U.S. current account deficit. It is possible that:

• If property measured, the true deficits were smaller than has been reported

• In some years they were not there at all.

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U.S. Current Account IV

• Every year US residents take some of what they earn in overseas investment income

• Interest on bonds

• Dividends on equities and

• Repatriated profits on direct investment

• And reinvest it then and there

• Corporations plow overseas profits back into their operations, often to avoid paying the high US corporate income tax implied by repatriating those earnings

• Technically this should be recorded as a bigger surplus on the investment income account matched by greater acquisition of assets overseas.

• Often it is counted correctly, but reason to think this is not always the case. 5

U.S. Current Account V

• His argument centers largely on the problem of underreporting of overseas assets, some of which probably originated in the reinvestment of overseas income.

• Many revisions in U.S. figures when these assets are “discovered”

• In addition, U.S. multinational corporations sometimes over-invoice impart bills or under-report export earnings to reduce their tax obligations – worked to overstate the recorded current account deficit

• If the true investment income is as large as double of what is reported

• the true current account balance entered the black in 2009 and

• has been in surplus ever since. 6