There are a number of major imbalances in the global economy. The one that provokes most comment is the US current-account defi cit. Apart from a brief blip in 1991, the US current account has been in deficit since the early 1980s, and over the past decade there has been a marked deterioration in the trend.
Normally, when a country runs a current-account balance the currency comes under pressure and real interest rates rise, tilting the balance of growth away from the domestic economy and towards the export sector. But the United States has managed to defy the normal laws of economics by virtue of the fact that the dollar is the international reserve currency.
During the 1990s, the negative flows across the US balance of payments on the current account were more than offset by the infl ows on the capital account. Foreign investors were keen to buy American assets and overseas companies were busy acquiring American businesses. During the bear market of 2000–03 these capital infl ows fell away. The currency came under pressure between 2002 and 2004, but it did not fall by as much as might be expected given the size of the current-account deficit. The reason for this is that another source of dollar buyers stepped into the market – the Asian central banks.
High saving ratios in Asia
A number of analysts including Ben Bernanke, chairman of the Fed, have characterised the imbalance on the US current account as not so much a problem of a lack of savings in the United States as a glut of savings elsewhere, particularly in the Asian economies. The effect of these central banks buying up US Treasury bonds and bills has been to keep long-term US interest rates artifi cially low.
An unsustainable imbalance
From whichever perspective the US current-account deficit is viewed, most analysts agree that an imbalance of this size, which is continuing to deteriorate, cannot be sustained indefinitely. It will require a global solution. In 1985, a similar problem was resolved by the Plaza Accord, whereby the g7 finance ministers agreed to intervene to reduce the dollar’s value, among other measures. By the end of 1987 the dollar had depreciated by 54% against both the d-mark and the yen from its peak in 1985. The move succeeded in reducing the current-account deficit from 3.4% of gdp in 1985 to 1.4% in 1990. This time around the problem is slightly different. At an estimated 6.4% of gdp, the defi cit is double what it was in the 1980s, and much of the counterpart to it lies in the emerging Asian economies and, since the sharp rise in the oil price, the oil-exporting countries. The Asian countries have large trade surpluses, but for political reasons they are reluctant to implement the appropriate policies to bring them down. Essentially, what is required is for the US savings rate to rise, the dollar to depreciate and domestic consumption in the Asian economies to be stimulated.
Low savings ratios and house prices
Rising house prices and low savings ratios in the United States and the UK, for example, are other facets of this potentially destabilising imbalance. In both countries savings ratios as a percentage of disposable income have been on a declining trend since 1990. In this respect, consumers have been behaving perfectly rationally in the face of rising house prices. They have realised that the capital value of their houses has been rising, so rather than making savings out of their income they have been accruing savings in the form of capital.
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