1. NS3040 Winter Term 2015 U.S. Current Account Balance

2. U.S. Current Account I Jeffrey Frankel, America the Balanced, Project Syndicate, October 20, 2014 Starting in 1982 the prediction has been for large U.S. current account deficits due to: Budget deficits Low national savings rate and Overvalued dollar Officially the current account has been in deficit for more than three decades Question is whether this is a problem. In 2008 when the global financial crisis hit, investors flooded into dollar assets even though crisis originated in the U.S. 2

3. U.S. Current Account II Also a substantial amount of U.S. adjustment has taken place since 1982 Dollar depreciations of 1985-87 and 2002-2007 and Fiscal retrenchments of 1992-2000 and 2009-2014 Big increase in domestic production of shale oil and gas has helped the trade balance recently As a result the US current account deficit in 2013 had Narrowed by half in dollar terms from 2006 peak and From 5.8% of GDP to 2.4% In addition a systematic adjustment has also occurred in China via Real appreciation of its currency Higher prices for labor and land 3

4. U.S. Current Account III China’s current account surplus peaked in 2008 at more than 10% of GDP By 2013 it had narrowed to 1.9% China’s trade adjustment in some respects followed that of Japan – original focus of American trade anxieties in the 1980s Frankel proposes a more speculative reason why it is time to stop worrying about the U.S. current account deficit. It is possible that: If property measured, the true deficits were smaller than has been reported In some years they were not there at all. 4

5. U.S. Current Account IV Every year US residents take some of what they earn in overseas investment income Interest on bonds Dividends on equities and Repatriated profits on direct investment And reinvest it then and there Corporations plow overseas profits back into their operations, often to avoid paying the high US corporate income tax implied by repatriating those earnings Technically this should be recorded as a bigger surplus on the investment income account matched by greater acquisition of assets overseas. Often it is counted correctly, but reason to think this is not always the case. 5

6. U.S. Current Account V His argument centers largely on the problem of underreporting of overseas assets, some of which probably originated in the reinvestment of overseas income. Many revisions in U.S. figures when these assets are “discovered” In addition, U.S. multinational corporations sometimes over-invoice impart bills or under-report export earnings to reduce their tax obligations – worked to overstate the recorded current account deficit If the true investment income is as large as double of what is reported the true current account balance entered the black in 2009 and has been in surplus ever since. 6