America borrowing from abroad to spend on consumption
America is running a current account deficit of just over 4pc of GDP. It has hardly ever run a surplus for the past 50 years.
The consequences of these perennial deficits are reflected in the progressive worsening of America’s net international asset position.
Whereas in 1980, America had a surplus of foreign assets over liabilities to foreigners of about 10pc of GDP, it now has a deficit of about 80pc.
Such deficits lead to a flow of intrest payments and dividends to those who have provided the finance.
America is selling assets and borrowing from abroad in order to spend on consumption – by both households and government. This may be fun while it lasts, but it won’t last forever.
The US position is unsustainable.
... That is not to say that the dollar cannot be depreciated.
America’s demand is outstripping its capacity to supply. Most notably, government spending is in excess of government revenue to by about 7pc of GDP.
There is potentially a grand bargain to be struck now which would see a rebalancing of aggregate demand across the main parts of the world, and a realignment of exchange rates, leading to a reduction in trade imbalances.
Trump Wants a Weaker Dollar. That Will Be Easier Said Than Done
But whereas the Bretton Woods agreement of 1944 was forged by countries that were close allies, any grand bargain now would have to be struck between the world’s hegemon and its leading challenger and strategic enemy.
Roger Bootle Telegraph 27 April 2025
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