THE UNITED STATES AND HER CREDITORS, CAN THE SYMBIOSIS LAST?

11/15/2005

Wynne Godley, Dimitri B.Papadimitriou, Claudio H. Dos Santos, and Gennaro Zezza

Levy Institute of Bard College
Red Hook, New York

EDITOR’S NOTE: The full text of this can paper be read at the Institute’s website and the material below serves to summarize the content of the paper. The team consists of a distinguished panel of economists who are using the Institute’s macro economic modeling program to evaluate the American deficit and especially the loss of U.S. trade credits and the consequent impact to the U.S. dollar. This is not a forecast of gloom and doom ahead but rather an exercise in identifying what must be managed to prevent gloom and doom. The value of such a study is to identify the sensitive variables for managing the U.S. Dollar and the consequent impact of not managing them. Thus the key parameters for the U.S. Treasury and Commerce Department are both identified and quantified for management action.

The main arguments in this paper can be simply stated:

• If output in the United States grows fast enough to keep unemployment constant between now and 2010, and if there is no further depreciation in the dollar, the deficit in the current account is likely to get worse, perhaps reaching 7.5 percent by the end of the decade.

• If the trade deficit does not improve, let alone if it gets worse, the United States’ net foreign asset position will deteriorate greatly, so that, with interest rates rising, net income payments from abroad will at last turn negative, and the deficit in the current account as a whole could reach at least 8.5 percent of GDP.

• Net saving (saving less investment) by the private sector is now (exceptionally) negative, to the tune of 2 percent of GDP, because of a spectacular increase in net lending to the personal sector. Our strong view is that, before the decade is out, the housing market will have peaked, a development that will check the growth in personal debt and reduce net lending. The resulting rise in personal saving will probably be enough to bring about some recovery in net saving by the private sector as a whole, increasing it from minus 2 percent to zero or even more.

• If the current account deficit reaches 8.5 percent of GDP in the next five years, and if the private deficit rises to zero, it follows as a matter of accounting logic that the (general) government’s deficit must be increased from its present 4 percent of GDP to 8.5 percent, while public debt rises toward 150 percent of GDP in the long run.