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Thursday, September 04, 2003

US: Debtor of the Last Resort?

Here's another one from the world bank: the US as the world's savings consumer. Roach is dead right when he talks about this kind of global imbalance. And note another detail, the shift in the form of financing, from equity to debt.

Finally, the U.S. current account deficit is surpassing historic levels. During 2002, U.S. external financing needs claimed 10.3 percent of the savings of the rest of the world—more than double the levels of 1998. Moreover, the composition of finance also shifted toward short-term flows: net FDI flows were negative by almost $100 billion; U.S. banks’ overseas lending had ceased; andforeign official inflows (most from East Asia) increased to nearly $100 billion, from $5 billion in 2001. A sudden reversal in these shortterm flows could undercut U.S. and world growth............

But the form of financing (that is, the composition of the net foreign-asset flow) has changed dramatically over just the last three years, while the region of origin of the inflow has shifted as well. The underlying nature of the capital inflow can, as demonstrated aptly in recent years, lead to questions of medium-term sustainability of the external deficit; while shifts in origin of flows can influence market expectations for adjustment in the value of the dollar against its major partner currencies. During 2000, the final year of the boom, the United States required net inflows of some $457 billion to cover its current account deficit. Financing was readily available, through increased mergers-andacquisitions activity that yielded net purchases of corporate bonds of $281 billion; complemented by strong $160 billion in FDI flows and some $85 billion attracted to 45 percent gains in NASDAQ. Together the equity component of flows (FDI and stocks) accounted for more than 50 percent of requirements—a strong fundamental position. The onset of recession in the United States during 2001 was clearly a transition year for investor perceptions. The fall of equity markets (NASDAQ down 50 percent) forced a compression of the highly diversified flows of 2000, as equity and FDI dropped to negligible
amounts and investors flocked into debt instruments. Long-term debt-related securities almost covered the U.S. requirement of some $420 billion in the year. The transition in composition of inflows evolved more fully in the difficult environment of 2002. FDI recorded net outflow of almost $100 billion; purchases of Treasuries by risk-averse investors
increased by $100 billion; a virtual cessation in overseas lending by U.S. banks yielded a net buildup in bank liabilities of $70 billion; and foreign official assets (largely East Asian) increased by $90 billion from an inflow of $5 billion during the previous year.LINK

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