Where do they get the 7% from?
Christian
----- Original Message ----- From: Doug Henwood <dhenwood at panix.com> To: <lbo-talk at lists.panix.com> Sent: Monday, September 27, 1999 5:12 PM Subject: U.S. prospects
> [Two Wall Street mavericks - so out of it that they're in New
> Hampshire - Marshall Auerback and Frank Veneroso of Veneroso
> Associates, caught wind of my U.S. foreign debt chart and sent me
> some of their stuff. I get uncomfortable amidst all this
> scaremongering, but here's an excerpt from one of their reports. The
> lead-in to this talked about how standard thinking in the 1980s was
> that the trade deficit was a function of the budget deficit, which it
> turned out not to be. The Long Beach data at the end refer to port
> shipping data, a proxy for Asia trade. As of July, outbound shipments
> were flat over the last year, while inbound shipments were strongly
> up.]
>
> The idea of the TWIN DEFICITS and its perils was a strange idea fixed
> in the minds of US investors in the past. Borrowing from abroad on
> the current account was somehow indissolubly associated with fiscal
> deficits even though economic theory and history suggested that
> external deficits and fiscal deficits were two completely different
> phenomena with no necessary linkage between them. There are ample
> cases to illustrate this point. Wartime USA was a period of massive
> fiscal deficits and huge current account surpluses. The emerging post
> war world was strewn with examples like Chile, where the current
> account deficit soared to 13% of GDP (1979) even though the Chicago
> boys ran a fiscal surplus. By 1993, Italy, a major G-7 economy, was
> running a giant fiscal deficit, but it enjoyed the largest current
> account surplus of the G-7 nations. And so forth.
>
> The question arises: does a current account deficit that occurs in a
> country with a fiscal surplus constitute a serious threat to that
> country's exchange rate and interest rate level? And the elementary
> answer is, of course it does. Chile in 1979 is a case in point. The
> massive current account surplus described above resulted in a massive
> depreciation of the exchange rate, sky high real interest rates, and
> ultimately a condition of both internal and external bankruptcy. The
> emerging world is full of other such examples. In the early 1990's,
> foreign investors poured into Mexico under the Salinas
> administration, because of the latter's widely admired fiscal
> policies. The resultant capital inflows created an overvalued
> exchange rate and a huge current account deficit, with the ultimate
> fall-out not unlike that of Chile. The same can be said for several
> of the emerging Asian countries in the recent crisis of 1997-98.
>
> Emerging Asia in this regard is most illustrative. Here we had
> countries with fiscal balances and low shares of government as a
> percentage of GDP. However, in some countries, there were large
> current account deficits which were matched by large private sector
> savings deficits. The combination proved to be especially combustible
> when the crisis came, since private borrowers, who are weaker debtors
> than governments and quasi-public institutions, proved to be
> especially vulnerable when foreign sources of finance withdrew en
> masse.
>
> Let us now look at the US from this perspective. The picture is not a
> pretty one. The US federal, state and local governments are
> generating a combined fiscal surplus of 1.5% of GDP or more. The US
> current account deficit is approaching 3.5% of GDP and likely rising.
> It is a national accounts identity that the savings deficits of the
> two combined private sectors - households and corporations---must
> equal the sum of these savings surpluses of the government and the
> rest of the world. It does not matter if the US household savings
> data understates household savings, as many Wall Street economists
> argue; that simply implies that the corporate savings data - retained
> profits -are overstated by a corresponding amount which, given the
> lofty valuation levels of current US stock prices, is probably for
> the worst (although these same Wall Street economists never
> acknowledge this latter point). Given the short falls in both US
> household and corporate savings, the large private sector deficit of
> the US must now be largely financed from borrowings from the rest of
> the world.
>
> How large is such a private sector deficit, comparatively speaking?
> Wynn Godley at the Levy Institute at Bard College tells us that at
> current levels, the US private sector is at a dangerous threshold; at
> these sorts of levels in other G-7 countries, a recession and, often,
> a financial crisis, has ensued. If the current account deficit in the
> US is in fact increasing, as the Long Beach export data suggests, and
> as Tim Congdon predicts, then, as by this simple national accounts
> identity, the US private sector deficit is entering new high ground.
>
> Now, if the US private sector financed its savings deficit with the
> issue of equity matters might not be so grave. Private borrowers
> cannot weather having the plug pulled on them by their lenders, but
> if they "borrow" with the issue of equity, not debts, the former
> being perpetual claims that require no fixed payments, such borrowers
> can weather a considerable storm. But in the US, in a manner with
> virtually no precedent in the history of capitalist economies, the
> corporate sector is not only financing its savings deficit with the
> issue of debt---it is also retiring equity with debt close to the
> tune of 2% of GDP a year. This implies that the debt issue of the US
> private sector equates to 7% of GDP and that this huge private debt
> issue is dependent upon foreign creditors. There are no parallels in
> the history of the industrialized world for such large and possibly
> very vulnerable private sector profligacy.
>