Transcript The U.S. Current Account Balance

NS3040
Fall 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 land
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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.
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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.
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