(My Thanks to Brad Delong for the link: http://www.stern.nyu.edu/globalmacro/Roubini-Setser-US-External-Imbalances.pdf)
Roubini and Setser have provided a very good Study of the Trade Deficit, Current Acounts balances, and the Net Debt entered into by the United States since 1997 when the U.S. net international investment position (NIIP) stood at a negative (-$360) billion. It has grown to a negative (-$2.65) trillion by the end of 2003. It is estimated to become a negative (-$3.3) trillion by the end of 2004. NIIP debt stood at 5% of GDP in 1997, and had grown to 24% of GDP by the end of 2003. It is expected to be 28% of GDP by the end of 2004.
These Authors point out the real difficulty in the American payment of these external liabilities remains the large amount of Imports v. a much smaller volume of American Exports. They express an estimate that current U.S. spending demand Japan and China absorb an additional $350 billion in U.S. Treasuries per year over the next four years, if it continues at the current level of increase. Methods of repayment of U.S. external debt entail the creation of a Trade suplus, or equilavent, while Imports continue to increase over Exports both in real and Currency terms. They also express the complications of a Dollar devaluation, or the increase of Interest rates to gain subscription of the debt. It is an interesting Read which all should undertake, and the Author will finish given time. lgl
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I found the Fed position on the Current Accounts imbalances in: MINUTES OF THE FEDERAL OPEN MARKET COMMITTEE, June 29-30, 2004.
At this meeting, the Committee discussed staff papers and presentations on adjustment of the U.S. external accounts. At more than $500 billion, the deficits in trade and current account balances are quite large in comparison with aggregate income. Financing of the deficits had recently included both large foreign private purchases of U.S. securities and increased foreign official inflows. The sizable current account deficit could be viewed as reflecting very low levels of national saving, in both its government and private components, in relation to investment opportunities in the United States that were very attractive. The staff noted that outsized external deficits could not be sustained indefinitely. However, the historical evidence indicated that such deficits could be quite persistent, and the adjustment of imbalances was not necessarily imminent. The adjustment, once under way, might well proceed in a relatively benign fashion, particularly if fiscal, monetary, and trade policies were appropriate, but the possibility that the adjustment could involve more wrenching changes could not be ruled out. In any case, a movement toward balance in the trade and current accounts would likely have effects that differ appreciably across sectors of the U.S. economy. Members of the Committee noted that monetary policy was not well equipped to promote the adjustment of external imbalances but could best contribute by maintaining an environment of price stability that would foster maximum sustainable economic growth. Fiscal policy had a potentially larger role to play by promoting an increase in national saving, but the adjustment would involve shifts in demand and output both domestically and abroad, and changes to U.S. fiscal policy alone probably would not be sufficient to foster the adjustment. lgl
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