Who Will Run the World s Deficits?

Deflation discourages optimism about the future. Shifting the entire adjustment burden onto peripheral countries with current account deficits, while core countries continue to run surpluses, obstructs adjustment.

Obama, by contrast, would run larger deficits his spending increase is much larger than his tax increase which imply large tax hikes in the future. Moreover, he would run far larger debt ratios than Romney, because the main driver of the debt is entitlement spending.

Undervalued exchange rates are only one of the policies that countries use to boost exports and restrain imports, so that they run trade surpluses, while their trading partners (including the US) run deficits. Policies aimed at ensuring export led growth also include export subsidies and barriers to imports.

Lacking in saving and wanting to grow, America must import surplus savings from abroad. And to attract that foreign capital, it has no choice but to run equally large balance of payments deficits.

What about market discipline? Is the German government s willingness to issue more debt and run bigger deficits limited because the market recognizes and penalizes nation states that allow their fiscal positions to weaken?

America s Three Deficits

Loving America s Deficits

Good and Bad Deficits

At a time when many advanced countries run government deficits, GDP linked bonds would improve risk management and bring down financing costs. They might also spur developing countries to do what it takes to join that market.

Emerging market countries run current account surpluses, while advanced economies have deficits. One would expect fast growing, capital scarce (and young) developing countries to be importing capital from the rest of world to finance consumption and investment.

Attention switched to the problem of fiscal deficits and the relationship between deficits and economic growth. Should governments deliberately expand their deficits to offset the fall in household and investment demand?

When some countries want to run smaller deficits without a corresponding desire by others to reduce surpluses, the result is the exportation of unemployment and a bias toward deflation (as is the case now). When some want to reduce their surpluses without a corresponding desire by others to reduce deficits, the result is a sudden stop in capital flows and financial crisis.

We have vast budget deficits.

America u0027s Other 87 Deficits

Obama has remained silent about reform of Medicare and Social Security, whose long run deficits are several times the national debt. Vice President Joe Biden has even said that no changes to Social Security are to be made.

Policymakers should pair fiscal measures to ameliorate the jobs and investment deficits now with a multi year plan to reduce the long run fiscal deficit gradually. This long run plan should increase spending on education, infrastructure, and research, while curbing future growth in health care spending through the cost containment mechanisms contained in Obama s health reform legislation.

Emerging market countries run current account surpluses, while advanced economies have deficits. One would expect fast growing, capital scarce nbsp (and young) nbsp developing countries to be importing capital from the rest of world to finance consumption and investment.

It is less easy to rationalize why the US government is continuing to run budget deficits despite a cyclical boom. When a fiscally responsible government launches a war, it typically cuts back on other domestic expenditures and raises taxes.

Run away. Run.

Mitt Romney and America s Four Deficits

Cash deficits of closed peacekeeping missions

Output growth in the US remains anemic, and the economy continues to face three significant deficits a jobs deficit, an investment deficit, and a long run fiscal deficit, none of which is likely to be addressed in an election year.

Households (and countries) that were most prone to spend cannot borrow any more. To revive growth, others must be encouraged to spend governments that can still borrow should run larger deficits, and rock bottom interest rates should discourage thrifty households from saving.

Financial markets have also made clear that the ability of other major deficit countries, like Brazil and India, to absorb capital flows is reaching its limit. Since the world is a closed system, this raises the question Who will run the world s deficits?

Deficits resulting from capital spending, by contrast, are or can be good. If wisely administered, such spending produces a revenue stream that services and eventually extinguishes the debt more importantly, it raises productivity, and thus improves a country s long run growth potential.

Moreover, an important advantage of fiscal devaluations is that they generate additional revenues in proportion to the country s trade deficit. For countries that are suffering from weak competitiveness and, as a consequence, running trade deficits, this typically means more revenues, especially in the short run.

But, despite China s position as one of the world s largest creditors, its net investment income balance is deeply negative. In fact, China has run investment account deficits for six of the last nine years, with preliminary statistics suggesting a deficit of 57.4 billion in 2012.

As long as the status quo persists, with strong global growth and stunning macroeconomic stability, the US can continue to borrow and run trade deficits without immediate consequence. Over time, the dollar will still decline, but perhaps by no more than a couple of percent per year.

It may seem appalling to expect such a highly indebted country to continue to run deficits but the world is willing to finance the US at negative real interest rates. Indeed, the main international concern has been US policymakers reluctance to raise the government s debt ceiling!

More recently, however, it has been the Americans turn consistently to run large current account deficits, buying more from the rest of the world than they earn by selling goods and services abroad. On this dimension, the US seems destined to repeat the mistake of the British.

In fact, US trade deficits are primarily the result of insufficient, mainly government, saving not a misaligned exchange rate, as economists have led policymakers to believe. Large US budget deficits during Ronald Reagan s presidency generated the famous twin fiscal and trade deficits of the 1980 s.

Run.

If they remove the stimulus too soon by raising taxes, cutting spending, and mopping up the excess liquidity, the economy may fall back into recession and deflation. But if monetized fiscal deficits are allowed to run, the increase in long term yields will put a chokehold on growth.

Within national income accounts, trade deficits represent the excess of a country s consumption over production. From an accountant s perspective, that makes it logical to label trade deficits as negative savings.

Fire! Run!

Run Tryton

I run.

You run.

Know ye not that they which run in a race run all, but one receiveth the prize? So run, that ye may obtain.

Know ye not that they which run in a race run all, but one receiveth the prize? So run, that ye may obtain.

After all, export led growth policies can succeed only if other countries are willing to run deficits. Given that the global imbalances that led to the crisis remain unaddressed, increased competitiveness will be a Pyrrhic victory and one that will exact a severe toll on domestic living standards and consumption.

Such a child will have memory and cognitive deficits in this domain.

However, the rapid expansion in domestic demand resulted in remarkable trade deficits.

When you run the numbers on a calculator, you run out of noughts.