The end is near

Stephen Roach, Chief Economist at Morgan Stanley, speech at the China Development Forum in Beijing on March 19.

“There is a very simple and extremely powerful macro point that is being overlooked in this debate: America no longer has the internal wherewithal to fund the rapid growth of its economy. Suffering from the greatest domestic saving shortfall in modern history, the United States is increasingly dependent on surplus foreign saving to fill the void. The net national saving rate the combined saving of individuals, businesses, and the government sector after adjusting for depreciation fell into negative territory to the tune of -1.2 per cent of national income in late 2005. That means America doesn't save enough even to cover the replacement of its worn-out capital stock. This is a first for the United States in the modern post-World War II era, and I believe a first for any great power over a much longer sweep of world history.

...America, in general, and its consumers, in particular, treat rapid economic growth as an entitlement. That leaves the United States with little choice other than to pursue the second option - drawing heavily on the global saving pool in order to fund economic growth. Once the United States started down the slippery path of consuming beyond its internal means, it got harder and harder to break the habit. Ironically, it has become exceedingly difficult for Washington to accept the consequences of that habit - a nation that has become beholden both to external funding and production. And yet that's exactly how China fits into America's macro equation.

That underscores a key attribute of the savings-short, deficit nation: It is forced to run current account deficits in order to attract the requisite foreign capital. And in the case of the United States, where external funding needs are so massive - now closing in on US$800 billion per year, or about US$3 billion per business day - most of the current account imbalance shows up in the form of a huge trade deficit. In 2005, the trade deficit in goods and services accounted for fully 93 per cent of the total current-account gap.