Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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US Treasury was for a global growth deficit before it was against it

by Brad Setser
September 23, 2004

The U.S. Treasury needs to get its talking points straight. It is hard for the Treasury to argue that the world economy is doing very, very well (the IMF forecasts global growth to be at a 30 year high) in one context (don’t worry about oil prices, global growth is strong) and to argue the US trade deficit is largely the result of a global growth deficit in another context.

The reality is global growth this year is strong, that US export growth this year is strong, and the trade deficit is widening because import growth is also strong. With a big gap between the United States’ $1.5 trillion import base and its $1 trillion export base, exports have to grow substantially faster than imports to keep the deficit constant. Exports are growing fast this year, but not anywhere near fast enough to offset 13-14% import growth.

The real problem is that the parts of the global economy that are growing strongly are also intervening heavily to keep their currencies from appreciating against the dollar, and so long as the US budget deficit is large, the US needs the cheap financing from their growing reserves to keep interest rates down, so it is not in a strong position to complain!It is true that growth in parts of Europe, notably Germany, is disappointing. But the U.S. also only exports $28.8 billion (2003 good exports) to Germany. If US exports to Germany were on track to double in 2004, that still would not have been enough to offset rising US imports and keep the trade deficit from widening. Stronger growth in Germany alone is not going to end the global imbalances associated with the US current account deficit. The deficit reflects the fact that the US consumption is rising faster than US income, along with growing US dependence on foreign savings to fund the budget deficit without crowding out domestic investment.

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