Transcript "The Dollar and the Deficit: Is a Crisis Looming and Where Do We

"The Dollar and the Deficit:
Is a Crisis Looming and Where
Do We Go from Here?"
Spring Conference
11:15 a.m. to 12:30 p.m. on Saturday, May 14.
Jeffrey Frankel
James W. Harpel Professor of Capital
Formation and Growth, KSG
The U.S. is going rapidly into debt
Net international investment position of the United States
$Millions, current cost
1.0E+06
5.0E+05
-1.0E+06
-1.5E+06
-2.0E+06
-2.5E+06
-3.0E+06
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
-5.0E+05
1976
0.0E+00
Widening US trade deficit
• Oil imports
• Stagnant exports
– Slow growth in Europe
& Japan
– Fading popularity of
US X?
• Value of the $
• Ultimately, current
account deficit is twin
of the budget deficit
.03
.02
.01
Net Exports
(ex. oil imports)
.00
-.01
-.02
-.03
-.04
Net Exports
-.05
-.06
1970 1975 1980 1985 1990 1995 2000
Sanguine views
• Bernanke (FRB): Asians’ high saving
makes it easy to fund US deficits.
• Cooper (Harvard): There is no alternative
to the US where they can put their money.
Can go on indefinitely.
• Dooley-Garber (DB): RMB peg is a
deliberate development strategy for China.
US is acting as World’s Banker, taking
deposits and lending long (esp. FDI).
Worried views
• Eventual hard landing: intl. investors will
pull out of US => i ↑, securities prices ↓, $ ↓.
• Obstfeld-Rogoff (UC & Harvard): US CA
deficit was unsustainable even in 2000.
• My view (& many others): It’s much worse
now, because budget is no longer in
surplus, 90s investment boom ended in
2000, & household saving =0.
• Roubini-Setser (NYU): crisis coming.
Tax cuts & spending rise have created
record budget deficits
US Federal Budget Deficit and Spending as % of GDP
7.0%
25.0%
6.0%
24.0%
5.0%
23.0%
4.0%
22.0%
3.0%
21.0%
2.0%
20.0%
1.0%
19.0%
0.0%
G.W. Bush
W.J. Clinton
R. Reagan
17.0%
J. Carter
18.0%
G.H.W. Bush
26.0%
-1.0%
-2.0%
Spending/GDP (left)
Budget Deficit/GDP (right)
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
-3.0%
1977
16.0%
Budget deficit ↑ => National Saving ↓
=> Current account balance ↓
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
0.0%
-2.0%
-4.0%
-6.0%
Net Natl Saving (% of GDP)
Net Domestic Investment (% of GDP)
Current Account (% of GDP)
US international debt heading into
alarm zone
• > 24% of GDP
• 11 times export earnings
• In range of crisis victims such as
Argentina and Brazil
Then why are US long-term interest
rates so low now?
During 2001-04, US rates were kept low by
• Easy US monetary policy
• Asian CBs also buying US T bills
• Overoptimistic forecasts re future budget
deficits
All 3 supports are coming to an end.
=> US bond market is vulnerable
At some point, foreign CBs will
switch out of $
• Geopolitics: US has lost the good will that
kept Germany, Japan, & others supporting
the $ in 1960s, late 1980s, & 1991
• Economics: Each country will fear to hold
a currency that others are selling
• As £ lost its international role in 20th cent.
• There now exists credible rival for $: the €
In the long run, the $ could lose its
role as #1 international currency
Simulation of currency shares: If new EU 10 join euro; UK, Swe., Den. do not.
+ $ continues to depreciate at the 2001-04 rate.
1.0
USD
0.8
0.6
0.4
DEM
EUR
0.2
0.0
75
80
85
90
95
00
05
10
15
20
25
30
35
40