The IMF just published its annual report on the US economy.
The report was in some ways remarkably frank. And it outlined the core policy choice the US government has made, namely, not to do anything to try to reduce the vulnerabilities associated with the large – and I suspect still growing – US current account deficit.
The money quote: "The authorities observed there was little more than US policy could do to address global imbalances"
The IMF does not agree: their work (see Chapter V) suggests more aggressive efforts to reduce the fiscal deficit would have an impact.
Ted Truman (and Paul Volcker) do not agree. Truman thinks monetary policy should try to maintain balance between aggregate supply and aggregate demand – which, in practice, means the Fed should do more to reign in demand growth.
The problem is not just that the US is borrowing large sums from abroad, but it is borrowing in ways that are unlikely to generate the future income needed to pay the debt back, as (to quote the summary of the IMF's Executive Board discussion) "foreign savings and corporate profits increasingly [are] financing government and household spending."
The last (2004) IMF Article IV report on the US forecast – almost magically – the US current account deficit would wither away. It predicted the deficit would peak at around 5% of US GDP in 2004 and start falling in 2005. That forecast was no doubt done at the end of 2003 and the IMF assumed (like many) that dollar depreciation would have a bigger impact than it did. Still, the IMF's old forecast for the 2005 current account — around 4.5% of US GDP — is not going to even be close to this year's number, and that was clear from the moment it was released. This year's Article IV report represents something of an improvement: it forecasts a 6.1% of GDP current account deficit from now until 2010.