Key Issues in International Trade and Finance Sustainability of the External Accounts, Global Co-dependence & the Role for Exchange Rates
Dr. Catherine L. Mann Senior Fellow, Institute for International Economics (CLMann@IIE.com)
Global Issues and the US Outlook Macroeconomic Advisors and Global Interdependence Center Philadelphia, April 14, 2004 Š Institute for International Economics
Catherine L. Mann, Institute for International Economics
The Dollar & the External Accounts
2
The Dollar & Concepts of Sustainability Portfolio view
Catherine L. Mann, Institute for International Economics
Trade view
• $ must fall because • $ will fall due to foreign trade deficit is huge. portfolio rebalancing • Why: Trade deficit • Why: US assets absorb (CA/GDP) gets ‘too ‘too much’ of increase in large’, cumulating to global wealth, ‘too large’ NIIP, leading cumulating to ‘too high’ to large net service a US share in foreign payments which reduce portfolios, causing C or I diversification concerns & rebalancing 3
Catherine L. Mann, Institute for International Economics
Sustainability: The Trade View
Large trade and current accounts deficits have not yielded large or significant service payments. But with large NIIP, current account is highly sensitive to interest rate. Large dollar depreciation needed to ‘stabilize’ current 4 account.
Source: Department of Commerce/BEA, Author’s Calculations
Catherine L. Mann, Institute for International Economics
Sustainability: The Portfolio View Economist Portfolio Poll
1992
2003
US share in foreign portfolio
93-95 96-97 98-2000
2002
03
04
05
Share of US equities in portfolios of global investor Tops out in 2003 Dramatic continued depreciation of dollar needed to stabilize share 5
Source: Department of Commerce/BEA, Author’s Calculations
Catherine L. Mann, IIE
06
Catherine L. Mann, Institute for International Economics
So, which dollar path? Global Re-Balancing
Global Co-Dependency
• Huge current account • US saving trends & import deficit & net financial habits offerings • Foreign saving trends & • Further significant dollar export habits depreciation for global • Exchange rate rebalancing & management to avoid sustainability of external accounts market adjustment 6
Global Co-Dependency: US side
Catherine L. Mann, Institute for International Economics
Trending down & renewed dis-savings: HH & Fiscal
7
Catherine L. Mann, Institute for International Economics
Reflected dramatically in trade balance
8
Global Co-Dependency: ROW side
Catherine L. Mann, Institute for International Economics
‘saving’ tendency exacerbated by 1997 crises
9
Catherine L. Mann, Institute for International Economics
With ROW growth depending on net exports to US
10
Catherine L. Mann, Institute for International Economics
Foreign XR management to avoid rebalancing
11
Catherine L. Mann, Institute for International Economics
Which is reflected in official purchases of US assets
12
Catherine L. Mann, Institute for International Economics
What if XR management ceases but dollar only settles at historical index lows?
13
Catherine L. Mann, Institute for International Economics
Conclusion • Global co-dependency, as reflected in XR management, is preventing some global rebalancing • But, even with XR at historical index-value lows more must happen to have meaningful rebalancing • Structural change needed to break-up global co-dependency 14