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Monday, July 07, 2003

A Story of Arithmetic

Flashpoint on the way? This at least is Stephen Roach's latest warning. And the root of the problem, a US national savings rate fast approaching zero. The reason for this is in Roach's words the fact that: "most of America’s national saving now shows up in the form of depreciation -- funds that are earmarked for the replacement of worn-out physical assets". Now this way of putting things has a rather quaint air about it. It conveys an impression of a lot of worn down to breaking point machinery. If we say depreciated by the winds of creative destruction we might well be nearer the mark, especially since with the under-utilisation of productive capacity that has characterised US economic activity in the last couple of years it's hard to see too many things getting worn out in the classic physical sense. The rise in depreciation therefore may well be the result of an increasing obsolesence rate, a shorter turnround time on technology (which is probably more or less the same thing) and an increase in the scrapping of capital assetts associated with outsourcing to China (or Mexico, or wherever....). This is my hunch at any rate. And if I'm right, then this is also an indication of the difficulties associated with the attempt to hoard value for the future. Getting it right in major technological decisions is going to be more and more important, and it is important to bear in mind that this process is destructive of as well as productive of values. Playing the omniscient and omnipotent god seems to be getting more difficult by the day, and, as I indicated last week, it always was an impossible task.

There’s little concern about the mounting imbalances of a saving-short US economy. Nor are there any serious worries about the perils of a US-centric world. At least that’s the verdict that I take away from my recent discussions with investors, businesspeople, and policy makers around the world. That could be a dangerous oversight. The United States is rapidly approaching an ominous threshold -- a net national saving rate that is about to go negative. Could that be the flashpoint that sends a wake-up call to world financial markets?

This is a story of arithmetic. The accounting identity is often the most powerful of economic constraints. Such a framework is not subject to theoretical interpretations -- the identities simply have to add up, year in and year out. For any nation, saving must always equal investment. Unfortunately, America’s national saving rate is plunging into the danger zone. In the first quarter of 2003, gross national saving -- households, businesses, and government units, combined -- fell to 14.0% of gross national product; that’s down 1.5 percentage points from the year-earlier rate and fully 4.8 percentage points below the post-1960 norm of 18.8%. But that’s only the tip of the iceberg.

The problem is that most of America’s national saving now shows up in the form of depreciation -- funds that are earmarked for the replacement of worn-out physical assets. In the first quarter of 2003, such depreciation accounted for fully 94% of total saving. That means that the net national saving rate -- that portion of national saving that is available to fund the actual expansion of productive capacity -- fell to a record low of 0.7% of gross national product in the first period of this year. That’s off sharply from the year-earlier reading of 2.3% and is well short of the nearly 5% average of the 1990s and the 11% norm of the 1960s. There are few macro gauges that tell us more about an economy’s internally generated growth capacity. Sadly, America has all but depleted its reservoir of net saving -- the sustenance of longer-term economic growth.

This problem has profound implications for the US and the rest of the world. Lacking in domestically generated net saving, America has had to import surplus saving from abroad in order to grow its economy. In the parlance of the accounting framework noted above, the US saving-investment identity has been finessed by the willingness of the rest of the world to provide the funding. In order to attract that capital from abroad, America has had to run massive trade and current-account deficits. In the first quarter of 2003, the US current-account deficit hit a record 5.1% of GDP, or $545 billion (at an annual rate) -- an annualized shortfall that must be financed by capital inflows of slightly in excess of $2 billion per business day. Never before has the world had to finance an external imbalance of that magnitude.
Source: Morgan Stanley Global Economic Forum

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