April 11,
2009
Low Savings = High Trade Deficit
I
think your paper brings up a very important issue to understand, but which few
people really understand. There are trade deficits between countries, known as
bilateral trade deficits, which usually to do matter all that much. The
bilateral debt/surplus between two countries is largely a result of what the
countries produce and consume, along with government policies that impact
trading patterns. One country might run a bilateral deficit with amount country
year after year after year, with no real problem, because that same country may
be running surpluses with other countries. The more significant deficit/surplus
is the total deficit/surplus that a country runs with the world. The most
important factor in determining this deficit/surplus is a countries savings
rate. If a country spends more than it produces, it will run a trade deficit
with the rest of the world. Likewise, if a country produces more than it
consumes, it will run a surplus with the rest of the world. Producing more than
you consume is the economic definition of savings. Thus, high saving countries
like Japan and China run his trade surpluses and a low saving country like the
US runs deficits.
Deficits are not always a bad thing. If a country
runs a deficit because foreigners see it as an attractive place to invest, and
the country gains its extra spending power as a result of such investment, over
the long-term that investment can make the country even more productive.
However, if the inflow of foreign capital is simply going to consumption
(buying nice cars, more expensive home furnishings, nice meals at restaurants,
etc.) the trade deficit becomes unsustainable. The debt piles up faster than
the productive capacity to produce income and pay off the debt. After the
1997-1998 Asian financial crisis many countries adopted policies to ensure
higher savings rates and thus to protect themselves against another financial
shock. According to Ben Bernanke, the world became awash with excess savings. http://www.federalreserve.gov/boarddocs/speeches/2005/20050414/default.htm
The United States became the
borrower and spender of last resort. With low US savings and ever increasing
debt, this pattern is unsustainable. It is also one of the primary causes of
the financial crisis.