Relevant and even prescient commentary on news, politics and the economy.

The Pound’s Not Sinking, The Yen’s Not Keeping Up…

Spent the past few minutes reading Alea. jck notes that, over the past five years, the Pound has grown in importance at the expense of the yen and that the Euro has done the same against the dollar.

If this goes against your memory, you’re not part of the IMF.

Even better is when jck gets his funny on. For those screaming about PIIGS, he presents the evidence:

Note: Banks and government debt rollovers amount to €210 bln for 2011, €15 bln lower than in 2010, you would never guess that reading the funny (pink) papers.

Somewhere, an FT editor is reading that and cheering that they’re on holiday until the 4th.

Tags: , , , , Comments (0) | |

Who’s saving where? An application of the 3 Sector Financial Balances Map

Dean Baker finds gaping holes in deficit hawk rhetoric using the simple accounting identity that national saving must equal the current account (S-I = CA). If the domestic private-sector’s desire to save is positive, then the only way for the public sector (i.e., government) to net save is for the economy as a whole to run a sizable current account surplus.

Singapore does just that. Spanning the years 2004-2009, the average current account surplus was near 21% of GDP, which enabled the government to run surpluses near 5% of GDP and the private sector to save 16% of GDP. Singapore is a net-saver in all sectors of the economy: private, public, and international. However, it’s Singapore’s huge current account surplus that allows the domestic sector to net save, and not all financial balances are created equally.

Let’s use a slightly different version of Rob Parenteau’s 3 Sector Financial Balances Map to illustrate that not all financial balances are created equally.

The chart illustrates the combination of private and public surpluses (or deficits) that prevail at each of three “zones” of the Balanced Current Account Line (BCAL). The BCAL zones are: CA > 0 to the right of the red line, CA World Economic Report database, October 2010, is used to construct the average 3-Sector Financial Balances Map for the IMF’s Advanced Economies spanning the years 2004-2009. (Note: Singapore, Norway, and Iceland are not illustrated because their respective sector financial balance points lie outside the normal range and distort the map.)

The public-sector financial balance (PubS) for each economy is the IMF’s measure of general government net lending as a percentage of GDP. The domestic private-sector financial balance (PrivS) is the residual of the current account as a percentage of GDP less PubS such that the following identity holds:

PrivS + PubS = Current Account
(please see Rob’s post for further detail on the sectoral balances approach)

In the chart, the four quadrants of public-sector and private-sector financial balances that account for the CBAL zones across the Advanced Economies are:

I. PubS > 0 (public-sector surplus) and PrivS II. PubS III. PubS > 0 and PrivS > 0
IV. PubS 0

The quintessential savers are listed in quadrant III and to the right of the BCAL: Sweden, Hong Kong, Luxembourg, and Singapore (not shown). The classic debtors are listed in quadrant II and to the left of the BCAL: Ireland, Spain, Portugal, Greece, and a couple of other Eurozone economies that are not labeled (Cyprus, Malta, and Slovak Republic). Finally, quadrants I and IV list economies that have positive saving in one of the domestic accounts: public (I) or private (IV).

The point is pretty clear: in order for the government to net-save, PubS > 0, either the private sector must dissave and/or the current account must be in surplus. It’s that simple.

Notice that the financial balances of Spain, Portugal, Ireland, and Greece are in quadrant II and to the left of the CABL. These are averages, and the fiscal deficit worsened markedly in 2009 and 2010 as the private sector incentive to save surged. Currently, though, the fiscal adjustment requirements are huge (deep into quadrant II). For example, Spanish policymakers announced a deficit reduction path to take the PubS
Given that Spain, for example, is starting from a point of hefty private-sector deficits over the last five years, on average, the sole hope for a successful policy tightening lies with external demand growth (the current account). Spain needs massive export income in order to finance such reductions in the government deficits.

So who will succeed in reducing their public fiscal deficits? Pretty much any country with private surpluses has a fighting chance: Germany, France, the Netherlands, Belgium, the UK, and the US even (on the corporate side). The problem is, that policy makers can’t just tell the private sector to start dissaving. Well, it can, but incentives may be needed.

All else equal, recent FOMC announcements furthered a dollar sell-off, and along with recent disinflation the economy has a fighting chance if policy does move toward austerity. But as Dean Baker suggests, more currency re-valuation is needed.

Rebecca Wilder

Tags: , , , Comments (7) | |

Is the government actually forecasting a narrowing of the U.S. current account deficit?

This is a follow up to an article I wrote earlier this week, Older workers working longer; labor-force participation falling. In response to the article, which highlights the BLS employment and labor-force participation projections for 2008-2018, 2slugbaits (a loyal AB commenter) presented the following point:

The 2 industry sectors expected to have the largest employment growth are professional and business services (4.2 million) and health care and social assistance (4.0 million).

Put another way, employment growth will be in nontradeable goods sectors, which suggests we might have to sell a lot of assets in order to pay for imports.

Is the government actually forecasting that Japan an China will finance the U.S. trade deficit for the next ten years? I assumed (silly of me) that any government (BLS) projection would be based on such international pledges as the U.S.-China Strategic and Economic Dialogue:

To this end, both countries [U.S. and China] will enhance communication and the exchange of information regarding macro-economic policy, and will work together to pursue policies of adjusting domestic demand and relative prices to lead to more sustainable and balanced trade and growth.

…and more specifically…

The United States will take measures to increase national saving as a share of GDP. The U.S. household saving rate has already risen sharply as a result of the crisis, contributing to a significant decline in the U.S. current account deficit, and the United States will adopt policies that will continue to encourage household saving.

The U.S. commitment: grow national saving as a share of GDP and significantly reduce the current account deficit. According to the BLS long-term forecast, the U.S. will make good on just one the these two pledges.

The table below extracts national saving and the current account from the BLS 2018 economic assumptions for the employment projections (Table 4.3).

Note: two identities are needed: (1) National Saving is Income minus Consumption minus Government Spending, and (2) the Current Account is National Saving minus Investment. The BLS projects GDP rather than GNP = GDP + net receipts from the rest of the world. In using GDP as the definition of “income”, net receipts from the rest of the world is zero, and the current account reduces to net-exports.

To be sure, the BLS does forecast that U.S. national saving rate will rise 67.5%, from 9.3% of GDP in 2008 to 10.2% in 2018. But domestic investment rises by more, +72.1%. Therefore, the current account deficit grows by 81.3%.

I’m not seeing any healthy reduction of the current account deficit by 2018. 2slugs is right: the BLS is essentially forecasting that China and Japan (among other perpetual savers) will finance a growing U.S. trade deficit. Oh man.

Rebecca Wilder

Tags: , , Comments (23) | |

Sit back and relax: the US and China, this is gonna take awhile

China exported its way to a $2 trillion dollar fortress of F/X reserves ($USD mostly), while the US borrowed its way into a hole deep enough to spark a vast global recession. Who’s to blame?

Given the symbiotic relationship in the chart above, it’s hard to blame any one individual, group, or even country. But blame we do. Martin Wolf, at the Financial Times, wrote an interesting article about the need for a “co-operative adjustment” of global current account deficits and surpluses. He argues the following:

China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises.

It sounds so imminent: re-balance now, or else. Sure the tides of portfolio flows must change; structural current account imbalances are now proven to cause economic catastrophe, as illustrated by the 2-yr case study of late. But it’s not going to happen over night. It takes a long time for re-balancing of any kind to fully pass through. Just look at Japan in the 1990’s.

Data note: you can download Japan Flow of Funds data here, and US Flow of Funds data here.

The chart above illustrates the debt bubbles in the US financial crisis and in 1990’s Japan. In Japan, the households didn’t accumulate as much debt relative to the non-financial business sector; however, both sectors dropped leverage. And notice, that it took about a decade for households and firms to do so.

What’s overly obvious is that the Chinese will not be bullied into revaluing the yuan just because the US says so. And also evident is that there is a (very lengthy) de-leveraging process underway in key economies. By default, the debt-reducing developed world will force the Chinese to focus policy more inward (domestic demand) and less outward (export demand), as US consumers drop debt levels. But sit back and relax, it’s gonna be a while.

Rebecca Wilder

Tags: , , , Comments (33) | |