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.112 DOLLAR OVERVALUATION AND THE WORLD ECONOMYCopyright 2003 Institute for International Economics | http://www.iie.com Figure 5.12 Elements of the national accounts identitySources: Bureau of Economic Analysis, National Income and Product Accounts Tables, andauthor s calculations.Given that solid economic growth continued for several years, investmentspending was surprisingly weak in the second half of the 1980s.The investment boom of the 1990s is evident in the figure.Over thisperiod information technology equipment became increasingly important,and this equipment has rapidly declining prices, so the rise in investmentshare was accompanied by an even faster rise in real investment.Depreciation, which is hard to measure anyway, is fortunately not muchof a story.It moved up after the 1960s, offsetting the upward shift ingross investment, but has been a very stable share of GDP since then.Inpainting the broad-brush picture, we can take depreciation as a constant.Much of the action in figure 5.12 comes from the last three lines: netsaving,20 the budget balance, and net exports.All three series are cyclical,particularly the latter two.Unemployment was high in 1975-76, 1982-83,and 1992-93, and during these times the budget moved strongly toward20.Net saving is calculated as a residual.It is GDP minus depreciation, minus consumption,minus taxes, plus transfers.This differs from reported saving numbers because of thediscrepancy between the income and product sides of the NIPA.The above identity doesnot hold for gross domestic income.The trends of net private saving shown here are verysimilar to the reported saving rate, but because of the growth in the statistical discrepancy,saving in figure 5.12 falls further in the last couple of years.PERSISTENT DOLLAR SWINGS AND THE U.S.ECONOMY 113Copyright 2003 Institute for International Economics | http://www.iie.com Figure 5.13 Cyclically adjusted elements of the national accountsidentity, 1959-2001Source: Bureau of Economic Analysis, and author s calculations.deficit and net exports moved strongly toward surplus.21 Cyclical move-ments create a negative correlation between these series.The unemployment rate was used to construct cyclically adjusted valuesfor the shares of gross investment, net saving, the budget balance, andnet exports,22 and the adjusted values are shown in figure 5.13.In thischart, a positive association between budget and trade deficits emerges.The combined federal, state, and local budgets went into a trend of worsen-ing deficits in the 1970s and into even larger structural deficits in the1980s.Net exports moved into a parallel pattern of deficits over thisperiod, which economists referred to as the twin deficits. 23The argument about the twin deficits is now the stuff of textbooks, butto summarize briefly, the idea was that the rising budget deficits sharplyreduced government saving (increased government dissaving).Since21.The NBER-dated cycle peaks and troughs give the economy s turning points.The budgetdeficit and net exports respond more to the gap between actual and potential GDP, whichis reflected in unemployment rates.Unemployment movements lag significantly behindpeaks and troughs.22.Current, leading, and lagged values of the unemployment rate were used.23.See Mann (1999) for a discussion of the twin deficits of the 1980s and why theybecame uncoupled.114 DOLLAR OVERVALUATION AND THE WORLD ECONOMYCopyright 2003 Institute for International Economics | http://www.iie.com there was no offsetting rise in private saving, in fact private saving as ashare of GDP started to fall after the mid-1980s; this meant that the impactof the budget deficits was largely pushed onto the trade account, resultingin a large trade deficit.In essence, an inflow of foreign capital was used,directly or indirectly, to finance the large government deficits.The mechanism bringing about this relation was that real interest ratesrose, pulled in capital, pushed up the dollar, and caused a trade deficit.The combination of a very expansionary fiscal policy and a restrainedmonetary policy changed the equilibrium in the capital market.The gov-ernment was supplying large amounts of bonds, and to absorb thesebonds, interest rates had to rise.The availability of high real interest ratesin the United States attracted foreign capital, which made up the gapbetween domestic saving and domestic investment.But the effect of thecapital inflow was a soaring dollar it rose from an index value of 88 inJune 1980 to a peak of 127 in March 1985, an increase of 37 percent.24 Thestrong dollar, in turn, restrained exports and encouraged imports, andthe trade deficit emerged, with net exports hitting 3 percent of GDPin 1987.The twin deficits story was actually more complex than this.First, therise in real interest rates also cut into investment, some parts of whichare interest sensitive.As noted above, investment was fairly weak in thelate 1980s, given a strongly growing economy.The deficit did crowd outdomestic investment to an extent.Second, there are lags in the adjustmentof trade flows to the exchange rate.The trade deficit continued to worsenuntil 1987, two years after the fall in the dollar started a familiar J-curveeffect that occurs because export growth is slow to increase and importsare more expensive in dollar terms as the dollar falls.This means thatcapital inflows were actually increasing in 1986 and 1987 with a fallingdollar.The dollar had to fall enough that it was then expected to appreciateagain, so foreigners were willing to buy larger and larger amounts ofUS assets.Official reserve holdings of the dollar increased during that period, asforeign governments feared an even faster dollar decline than actuallytook place.Official foreign holdings of US assets rose by $120.8 billionin 1986-88, representing 28 percent of the US current account deficits inthose years.Foreign governments were funding a significant proportionof the US current account and budget deficits.The dollar index fell to 98.5 in March 1987, down 26 percent from itsMarch 1985 peak [ Pobierz całość w formacie PDF ]