US Borrowing Less?
In my post this morning about the personal income and spending reports, I said:
Contrary to what the mainstream economists say, a rising savings rate is a good thing. The sooner we rebuild our savings, the sooner we can start to consume again.
Income was higher but it appears that a lot of the increase was due to transfer payments. Those transfer payments are being funded through higher deficits so while individuals are trying to do the right thing for the economy by saving more, the government is doing its damndest to offset it by getting deeper in debt.
According to Brad Setser, individuals and corporations are winning the battle with government:
The United States is borrowing less from the rest of the world than it was. That is true even though the US Treasury is borrowing more from everyone, including more from the rest of the world.
The amount the US borrows from the world is the gap between the amount that Americans save and the amount that Americans invest at home. That turns out to be equal to the current account deficit. And for the US, it so happens that the current account deficit is about equal to the (goods and services) trade deficit. The trade deficit — at least in the first quarter of 2009 — was way down. In dollar terms, it was about half as big as it was in the first quarter of 2008. That implies that the US is borrowing far less from the world now than at this time last year.
Why hasn’t the expansion of the fiscal deficit pushed the amount the US borrows from the world up? Simple. American households and businesses are borrowing a lot less, so the total amount of money that Americans are borrowing isn’t rising.
The only problem is that this is a backward looking analysis. As the economy recovers, the trade deficit will rise again (and that will be exacerbated by a falling dollar as import prices rise). Setser again:
But there obviously are still risks.
As households and firms rediscover their animal spirits and start to borrow more, the amount the government borrows needs to fall. Otherwise, total borrowing would rise, and the amount that the US needs to borrow from the world would rise.
More immediately, while the US is borrowing less from the rest of the world, it is still borrowing from the rest of the world. A smaller trade deficit is still a trade deficit, and financing that deficit requires ongoing inflows from the rest of the world. That means that some creditor needs to increase their exposure to the US.
The chances of the government borrowing less in the immediate future are slim and none. So far, we’ve been lucky in that the foreign central banks who fund most of our deficit are still doing so, although they’ve taken to buying short term maturities rather than long term. Private foreign investors haven’t been so eager to buy American and increasingly, US investors are also looking overseas for growth investments. That doesn’t bode well for the value of the dollar. These things are somwhat self reinforcing. US investors invest in foreign markets which drives down the value of the dollar which drives more investment outside the US.
I don’t think the Chinese or our other major creditors will cut us off anytime soon, but that doesn’t stop private capital from flowing out of the US. The administration needs to address the value of the dollar with something other than the rote lip service that “a strong dollar is in the US best interests”. The Bush administration paid the same lip service to a strong dollar while pursuing economic policies that had the opposite effect. If the Obama administration follows a similar policy, it will get similar results.
By the way, Brad Setser is the best at following these capital flows and trying to figure out the effects. I don’t always agree with his analysis, but it is always thought provoking. His blog is at the Council on Foreign Relations website. Here’s a link to his blog.
- June 1st
