Facts, Figures and Myths
Chapter 10: The US Trade Deficit as an American Problem: Saving and Economic Structure
PRIVATE SAVING, CONSUMPTION AND DEBT The US trade deficit is an American problem because it is the result of too little saving and too much consumption financed by too much debt. The Congressional Budget Office makes this point quite clear by suggesting that “the US current account deficits of the past two decades were brought on primarily by a long downward trend in domestic saving as a percentage of GDP that began in the mid-1950s and accelerated in the early 1980s” (CBO, 2000). Likewise Kotlikoff (2008) argues that “the decline of the saving rate explains, in large part, why the United States has run a very large current account deficit in recent years”. The current situation in the US has materialized as follows. The decline in the saving rate led to a shortage of funds available for domestic investment, which caused interest rates to rise, attracting capital flows from abroad. As saving declined, consumption increased – this is because saving means consuming less out of current income in the present in order to consume more in the future. Therefore the decision to save now is equivalent to the decision to defer consumption and to store it in the form of an asset. The problems associated with a low saving rate include dependence on foreigners and retrenchment risk in consumer spending. If the saving rate falls too low to be consistent with sound long-run plans, a sudden correction of consumption habits may translate into a substantial reduction in consumption expenditure and therefore...
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