Contrarian macro numbers

Here are some numbers suggesting the US current account deficit is sustainable. They come from a 10/31 FT article by Richard Cooper, Harvard economics prof and former undersecretary of state for economic affairs.

Cooper assumes a continuing US account deficit of $500B, which is 5% of current GDP. (This year it is a bit bigger - at 6%, but going forward $500B is not implausible.) If US nominal GDP growth is 5% (3% real + 2% inflation), the fraction of US assets owned by foreigners as a consequence of the account deficit will rise over the years (due to payments), but not unsustainably.

From the rest of the world's point of view, the numbers are also not necessarily alarming. The ex-USA world produces $6 trillion per year in savings, so the account deficit means the US absorbs 10% of savings from other countries. Let's think about this a bit - if US GDP is $10 trillion, then ex-USA GDP is $30 trillion, so $6 trillion represents a world ex-USA savings rate of 20%. This seems a bit high to me (although the savings rate in China is reported as 40%!), but is confirmed by this Morgan Stanley report (How Depleted is the Global Savings Base?): ... the deterioration in the US C/A has been matched by an even larger accumulation of overseas savings.   As a result, the US now absorbs a smaller share of the rest of the world’s savings compared to the historical trend.  A related figure, which is often reported, is that the US account deficit absorbs almost 80% of foreign trade surpluses (usually the reports confuse foreign savings and foreign trade surpluses). Now, the US is 25% of the world economy, has 50% of marketable financial assets, and higher economic growth rates than either Europe or Japan, making it a desirable destination for investment. So perhaps absorbing 10% of foreign savings is sustainable. A portfolio manager might advise foreign investors to place at least that amount in US assets each year.

From this macro perspective, a meltdown is not inevitable. However, investor sentiment is a tricky thing. If foreigners become convinced that the dollar must decline in the coming years, they are unlikely to allocate 10% of their savings to US investments, even if we are a large and relatively dynamic component of the world economy.