US indebtedness a growing threat to global stability (WSWS)
By Nick Beams 23 May 2005
A study released last week on the present disequilibrium in the world economy points to the continued threat to financial stability posed by the never-ending growth of US indebtedness. The report, which examines global current imbalances and their impact on currency exchange rates, is the third in a series of papers published by academics Maurice Obstfeld and Kenneth Rogoff over the past five years. Both are well-known economists, with Rogoff having served for a period as chief economist at the International Monetary Fund.
They begin their analysis by pointing out that the US current account deficit is running at around 6 percent of gross domestic product (GDP), that the US is currently soaking up about 75 percent of the combined current account surpluses of the rest of the world and that to balance its current account simply by increasing exports, the US would have to increase revenues by 70 percent over 2004 levels. Their “overall assessment” is that the risks of “collateral damage” to the global financial system, apart from risks to exchange rate stability, have “grown substantially” over the past five years.
This is not simply because of the growth of the US current account deficit. Other factors are involved, including: the “stunningly low” personal savings rate in the US—down to 1 percent in 2004 compared to the average of 7 percent over the past three decades—the US government’s growing budget deficit, rising energy prices and the fact that the US has become increasingly dependent on Asian central banks to finance its deficits. If a sudden economic shock were to take place, the two authors conclude, “the damage might well be contained to exchange rates and to the collapse of a few large banks and financial firms—along with, perhaps, mild recession in Europe and Japan. But given the broader risks it would seem prudent to try to find policies to start gradually reducing global imbalances now rather than later”.
However, any significant move by the US economy toward balancing its international accounts will lead to global turbulence. According to the Obstfeld-Rogoff analysis, if the US current account deficit halves (that is, moves from 6 percent to 3 percent of GDP) Europe will lose export markets, due to a relative decline in the value of the dollar of about 25 percent, as well as experiencing “huge losses” on foreign asset holdings.
http://www.wsws.org/articles/2005/may2005/us-m23.shtml