Global imbalances: Globalization, demography, and sustainability

The current account deficit of the United States has been large in recent years, both in absolute size and relative to GDP. In 2006, it reached $811 billion, 6.1 percent of GDP. It has become a dominant feature of the world economy; if you sum up the current account deficits of all nations that are running deficits in the world economy, the U.S. deficit accounts for about 70 percent of the total. This paper looks beyond the national income accounting relationships to offer a more complex view of the U.S. imbalance. I argue that the generally rising U.S. trade deficit over the last 10-15 years is a natural outcome of two important forces in the world economy - globalization of financial markets and demographic change - and therefore that the U.S. current account deficit is likely to remain large for at least a decade. In a globalized market, the United States has a comparative advantage in producing marketable securities and in exchanging low-risk debt for higher-risk equity. It is not surprising that savers around the world want to put a growing portion of their savings into the U.S. economy. I argue that serious efforts to reduce the U.S. deficit, even collaborative efforts with other countries, may well precipitate a financial crisis and an economic downturn every bit as severe as the one that many fear could result from a disorderly market adjustment to the trade deficit.