Gideon's Blog does a fantastic job explaining how U.S. deficits, dollar policy, current account deficits, low interest rates et. al. fit together, what it all means, and what might be done.
Last week, I ran a post about the U.S. economy and the potential for trouble with the dollar. If you want the whole scenario laid out well in terms a non-economist can easily understand, Gideon's Blog explains:
- Why he's nervous about the U.S dollar & the world economy, but not the U.S. deficit.
- Why so much of the U.S. deficit is financed externally.
- Why investing in the U.S. makes so much sense in China and Japan, and the connection to low interest rates.
- Why this game hurts Europe in the short term, and China in the long term.
- Why the end of the current unstable balance will hurt America too, and an analysis of some of the options for dealing with the issue.
He concludes:
"The right kind of reform would not only address the inefficiencies and perverse incentives in the tax code, and would not only keep the overall level of taxation at internationally competitive levels, but would also start to address the American savings deficit that is an important cause of the current global economic imbalances."
Could we have a link, or am I stupidly overlooking something?
A broad observation before I read what Gideon's Blog has to say. As you note, the savings rate is the long-run critical issue.
Structurally over the next few decades, the US needs to be earning income on net capital invested abroad rather than paying out a hefty share of its income on the net capital invested in the US by foreigners.
This isn't xenophobia. Simply part of how we'll pay for an aging society when there are major youth cohorts that are severely underemployed in the developing world.
It's the big problem with Tom Barnett's schema -- of the four great flows he outlines, one is investment going from Core to Gap. Right now the US is sucking in the investment in the wrong direction.
This is not to suggest that the US should simply become a rentier nation -- we can't halt being a leading dynamic, productive economy and we clearly need to continue to achieve productivity gains and decent growth.
But we're not going to be able to afford our younger generations working double-time to not only pay for the boomers' retirement years but also pay foreigners for all the net investment we've pulled in because our consumption so overshoots our savings.
So looked at that way, a long-term commitment to "nation-building" in underdeveloped countries isn't goo-goo or bleeding hearts, nor is it mostly a matter of preventing breeding grounds or safe-havens for terrorism or international crime in the name of defending the homeland. It's pure economics. We have a vested interest in "shrinking the Gap" and in bringing rapid economic development and higher growth rates to a greater portion of the developing world so they can pay for the demographic transitions the wealthy countries are facing in the coming years.
But at the same time, we've got to shift the savings rate so the investment flows start reversing. Unfortunately, the rest of the world are junkies hooked on US consumption. The adjustment process should certainly include some reversal of our recent pattern of fiscal policy, which has exacerbated the core problem.
So the adjustment isn't likely to be pretty. And instead of addressing any of that, we're off on this wild goose chase over a non-problem in Social Security, which just means borrowing another trillion or so from abroad. Duh...
If our political masters keep up this nonsense, the currency markets are really going to finally bite, and let's all remember, currency markets always overshoot. Anyone for a 1971-74 replay? The only "good" news for the economy as a whole, by comparison to that era, is wage-price spiral pushes don't look likely. But we've certainly got the rest of the mix -- challenge to the dollar's reserve currency role, further oil shocks (in nominal $ terms), overbuilt/leveraged real estate markets, and a federal government that refuses to choose between guns and butter.
Here's the link that seems to be missing from the original post:
Gideon's Blog
DRK
Why save when housing appreciation does that for you? Or the stock market?
While the savings rate may be low, the trend towards an 'ownership society' in equities and stocks allows for higher rates of return on invested capital.
Granted, I have no statistical information to back any of this up, but it might be a worthwhile topic to explore.
Nadezhda - I am under the impression that the forced savings accounts that Bush is pushing for would boost the national savings rate in the long term, which is what you want isn't it? Or am I missing something? (It's late and I'm overcaffienated and should be studying for exams, so I may well not be thinking about this right...)
Matt, from an economic standpoint, you aren't adding to national savings if you're borrowing to do it ...
"Structurally over the next few decades, the US needs to be earning income on net capital invested abroad rather than paying out a hefty share of its income on the net capital invested in the US by foreigners."
Invisible Income from foreign investments built Britains fleet of dreadnoughts,a fleet Britains increasingly uncompetitive domestic economy could never afford.IIRC,Thatcher stated in her autobiography that this income amounted to 192% of Brit GDP
"This isn't xenophobia." That you feel the need to say this shows the degree that the leftist mentality"
"Simply part of how we'll pay for an aging society when there are major youth cohorts that are severely underemployed in the developing world."
Large numbers of bored young men destablize societies,armies are nifty ways of giving bored young men something to do.
"But we're not going to be able to afford our younger generations working double-time to not only pay for the boomers' retirement years but also pay foreigners for all the net investment we've pulled in because our consumption so overshoots our savings."
If only people on the high end of the bell curve are able to earn a decent living,we will experience severe social problems,economic problems aggravating the balkinization that's occured over the last 25 yrs.See my point above about bored young men.
" a long-term commitment to "nation-building" in underdeveloped countries isn't goo-goo or bleeding hearts, nor is it mostly a matter of preventing breeding grounds or safe-havens for terrorism or international crime in the name of defending the homeland. It's pure economics."
How?
No one wants to invest in unstable places lacking a rule of law and property rights.
Should we invade Zimbabwe to make it safe for investment??Can you hum "Rule Britannia"?
Besides,Iraq has stretched us to breaking point.
"bringing rapid economic development and higher growth rates to a greater portion of the developing world"
And their consumption of resources,like China's,will increase the cost of them,from iron ore to oil to soybeans to hotel reservations in tourist resorts.
The worlds entering an era negative cycles.
"so they can pay for the demographic transitions the wealthy countries are facing in the coming years."
They are not going to pay for our old people,the immigrants here aren't going to pay for our old people,come to that.They'll be competing for scarce(and declining)public resources themselves.
"But at the same time, we've got to shift the savings rate so the investment flows start reversing"
The coming bust of the housing bubble will deal with a lot of that,for the rest,a consumption tax to divert money to savings,higher interest to lure savings and low or no taxes on gains from this savings.
"non-problem in Social Security, which just means borrowing another trillion or so from abroad. Duh..."
And if that trillion or 2 isn't there.........?
praktike is correct,borrowed money is not "savings",nor is it "profit",it is debt and debt must be serviced.
Either pay it off or repudiate it,in either case it's a negative.
praktike - Yes, in the short term you're pushing the balance the other way, but in the long term this should serve to increase national savings, especially when combined with a Kolitkoff-like proposal to replace the payroll tax with a consumption tax.