Friday , April 28 2017
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Current account deficits are forever

Summary:
The back of the Economist magazine has current account deficits over the past 12 months for 42 major economies, comprising the vast majority of global GDP.  I noticed that they group neatly into 4 major blocks.  But first I’ll present the data for 5 regions: 1. Continental Europe (excluding Turkey):  6.8 billion CA surplus 2.  East Asia:  4.0 billion surplus 3.  English speaking countries (US/UK/Canada/ Australia)  8.9 billion deficit 4.  Latin America:  1.5 billion deficit 5.  Middles East/South Asia:   6.0 billion deficit Exceptions include Greece and Poland (which both have tiny deficits), Israel (which has a sizable surplus), and Indonesia and Philippines (which have tiny deficit). That’s it. In theory, the numbers should add up to zero.  I presume the net

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The back of the Economist magazine has current account deficits over the past 12 months for 42 major economies, comprising the vast majority of global GDP.  I noticed that they group neatly into 4 major blocks.  But first I’ll present the data for 5 regions:

1. Continental Europe (excluding Turkey):  $556.8 billion CA surplus

2.  East Asia:  $674.0 billion surplus

3.  English speaking countries (US/UK/Canada/ Australia)  $698.9 billion deficit

4.  Latin America:  $101.5 billion deficit

5.  Middles East/South Asia:   $116.0 billion deficit

Exceptions include Greece and Poland (which both have tiny deficits), Israel (which has a sizable surplus), and Indonesia and Philippines (which have tiny deficit). That’s it.

In theory, the numbers should add up to zero.  I presume the net global surplus reflects the fact that many of the smaller developing countries left off the list have CA deficits, and perhaps there is also a statistical discrepancy (measuring error.)

Let’s say I’m right that most of the missing countries are developing countries with deficits, and let’s mentally add them in with both Latin America and the Middle East/South Asia. Let’s call that big group “developing countries”, even though it technically excludes developing East Asia.  In that case the world has four blocks. Both English-speaking countries and developing countries have big CA deficits, and both continental Europe and East Asia have big surpluses.

So what’s going on here?  Basically, Europe and East Asia are investing lots of money in developing countries and English-speaking countries.  But why?

Developing countries have better growth prospects—thus India grows much faster than Switzerland and Singapore (two high surplus countries).  The English speaking world runs big deficits for several reasons:

1.  The Anglo-Saxon economic model is a good one, drawing in foreign capital.

2.  The Anglo-Saxon world is a safe place for investment, due to the legal system.

3.  The Anglo-Saxon world is a good place to move, as English is the global second language.  Thus if you are a Chinese person worried about the future of your country, Vancouver makes more sense than Vienna as a place to move if things go bad.  So you buy a house in Vancouver as a security blanket.

4.  The Anglo-Saxon world dominates high tech, which brings in lots of money that doesn’t show up in CA deficit data.

What am I missing?

I expect these “imbalances” to persist for many decades.  That’s because they are not “imbalances” at all, but rather equilibrium outcomes.  The world is basically Europe/East Asia on one side and English/developing on the other.  Why should that change in the future?


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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