Collapse of National Savings and US Current Account Deficits *

The puzzle posed by former French finance minister (ultimately president) Valerie Giscard d’Estaing in the 1960s is about to be solved. Giscard regrets that the United States is taking advantage of its position as the world’s dominant reserve currency and freely receiving support from the rest of the world for its inflated standard of living. This super privilege is about to wane. The dollar is likely to collapse and fall as much as 35% by the end of 2021. The reason: a deadly interaction between collapsing domestic savings and a large current account deficit. In the second quarter of 2020, net domestic savings – that is, savings adjusted for household, business and government consumption – returned to negative territory for the first time since the global financial crisis. Net domestic saving reached a level of 1.2% in the second quarter, which means that its share in national income is 4.1 percentage points lower than in the first quarter, and this is the largest quarterly drop in records dating back to 1947. Not surprisingly, it continued. The current account deficit follows the same path. Due to the lack of savings and the desire for growth, the United States benefited from the super-privileged possession of the dollar to borrow surplus savings from abroad, which pushed the current account deficit around -3.5% of GDP in the second quarter, that is, 1.4% less than the first period and also higher quarterly erosion at all.

While the Covid-related explosion of the federal government deficit is the direct source of the problem, that was to be expected. When the pandemic began, the net domestic savings rate between 2011 and 2019 was no more than 2.9% of GNI, less than half the average of 7% between 1960 and 2005. This thin pillow left the United States vulnerable to any impact. . In addition to the pandemic. With the accumulation of the budget deficit in the coming years, the downward pressure on domestic savings and the current account will increase. According to the latest estimates from the Congressional Budget Office, the federal deficit will reach 16% of GDP in 2020 and then drop to “just” 8.6% in 2021. Assuming the US Congress finally passes another round of tax exemptions. , Which is much larger than the probable deficit of 2021.
This will move the US net saving rate into negative territory much deeper than it was during the global crisis. The effect of this is ominous for America’s future. After eliminating the required depreciation of the aging capital stock of buildings and infrastructure, the United States is, in effect, liquidating the net savings necessary to expand productive capacity. Without borrowing surplus savings from abroad, growth is impossible. As a result, the current account deficit will deepen. All when the dollar loses its special privilege. With the United States’ position as the world’s dominant reserve currency slowly eroding since 2000, foreign lenders are likely to demand concessions on the terms of such massive external financing.
This generally takes two forms: the interest rate and / or the currency adjustment. The Fed has finally switched to a strategy that takes into account average inflation instead of a set target, and has promised to keep interest rates close to zero for several more years. This means that the interest rate channel has effectively been closed. As a result, the weakness of the dollar will now impose further adjustments in the current account.

In the second quarter of 2020, net domestic savings – that is, savings adjusted for household, business and government consumption – returned to negative territory for the first time since the global financial crisis.

The high value of the US dollar makes it especially vulnerable. Despite recent declines, the overall index of the dollar’s real effective exchange rate is still about 27% higher than its lowest level in July 2011. This makes the US currency the world’s most valuable major currency. , just when the United States has been dragged into an unprecedented spiral of checking accounts. Currencies are relative prices. The dollar has always benefited from the seductive magic of TINA, that is, there is no alternative. Think again. The July 21 deal on a 750 billion euro ($ 858 billion) next-generation EU fund sets out a pan-European fiscal policy. This is what should strengthen the undervalued euro. The renminbi, gold, and cryptocurrencies are also alternatives to the once invincible dollar. The dollar index fell 33% in real terms in the 1970s and mid-1980s, and another 28% between 2002 and 2011. During those three periods, the average domestic saving rate was 4.9% (compared to the -1.2% current) and the current account deficit was – 2.5% of GDP (compared to -3.5% today). With the United States wasting its superprivilege, the dollar is now more vulnerable to a sharp correction. Collapse looms.

* Article published in the Financial Times on October 5
** Member of the Educational Authority of Yale University and past president of “Morgan Stanley – Asia” and author of “Unbalanced”

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