Question: who said this in 1990?
“For about 15 years, the United States runs current account deficits, so that more than 6 percent of U.S. assets are owned by foreigners in 2010. High saving for the subsequent 15 years results incurrent account surpluses and reduces foreign capital ownership to 3.5 percent. Past 2020, however, with the rapid increase in the number of elderly, the United States again runs current account deficits, so that in the steady state almost 9 percent of U.S. assets are owned by foreigners.”
Answer, among others the current director of the US president’s National Economic Council, Larry Summers. In this monster article (An Aging Society: Opportunityor Challenge? – be warned large PDF download) written with David M. Cutler (Massachusetts Institute of Technology), James M. Poterba (Massachusetts Institute of Technology), and Loise M. Sheiner (Harvard University) and published in Brookings Papers On Economic Activity.
The whole thing is incredibly wonkish, so perhaps you won’t want to read it, but it is there, even if some of the details are wrong, and, remember, he is only talking about a model, and what it predicts. On the other hand the whole piece is extraordinarily prescient, even foreseeing the decline in US savings and their recovery (which of course is associated with the movements in the current account).
Basically, Summers et al are only saying (but 20 years earlier) what Claus is saying in that pesky chart I keep insisting on putting up (see below).
But now that you are getting used to looking at it perhaps the time has come to explain a bit more about it. Summers et al spoke about a new steady state (where the US again reverts to current account deficits). This is the situation Finland, for example, may be near too. But if you look at the chart, this is not a steady state, since their is no homeostatic correction mechanism this time, and the need for exports (the export dependency purple line) simple heads off exponentially towards infinity, while the level of deficit does the same in the opposite direction.
The reason that the need to export moves exponentially upwards is that median age doesn’t just move up from one level to another, and sit there, but keeps climbing steadily upwards, and the more it rises, the less bang for the buck GDP growth you get from any given level of exports. This is the situation we are seeing now in Germany and Japan, and it is evidently not sustainable. So, if we don’t do something, and do something now, to stop median ages rising too rapidly, then more crises are guaranteed, and the next round will make this crisis will seem like, now how do they put it, oh yes, a picnic.
That this way of thinking about things is one piece in the new, post-crisis, macro mindset that will emerge, I have no doubt, since the crisis is all about imbalances, and this is one model for understanding them. Basically one group of people – the current account surplus people (China, Japan, Germany, Sweden) – were afloat with money, and spent their time recklessly lending it to another group of people – the current account deficit crowd (you know, the United States, Iceland, Ireland, the UK, Spain, Portugal, Greece, Romania, Bulgaria, the Baltics, Hungary and New Zealand etc, etc) – who needed to fund their deficit habit, and did it by equally recklessly borrowing money. So if you want to understand the banking crisis, you need, as Brad Setser would say, to follow the money and find the surpluses and deficits.
And all of this helps us understand not only the crisis, but also the problems we are going to have getting out of it, since as Larry Summers noted over lunch with the FT’s Chrystia Freeland “‘The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.’
As Freeland highlights, on this possibility, Summers is bullish. “The very great enthusiasm for accumulating reserves that one saw globally is likely to be a smaller factor over the next decade than it has been in recent years” he predicts. And so too is economic growth (going to be a smaller factor over the next decade), Edward Hugh rapidly adds, since with everyone looking to export their way out of trouble, we have to ask, as Krugman pointed out, the tricky question about just who the customers with the current account deficits are going to be to enable all the exports. There is a long hard road ahead.
And the first evidence of this can be found in yesterdays US trade report, May exportswere up 1.6 percent, while imports were down 0.6 percent resulting in the smallest trade deficit since November 1999. Well, this is what the world wanted, and this is what it is now going to get. So everyone should be happy, I guess.