The Sustainability of the US External Imbalances
Stern School of Business, NYU and
Research Associate, Global Economic Governance Programme, University College, Oxford
This paper analyzes the sustainability of U.S. external deficits7 and the "Bretton Woods Two" international monetary system that is integral to their financing. It therefore examines the sustainability of what Larry Summers has called the "balance of financial terror"8 – a system whose stability hinges on the willingness of Asian central banks to both hold enormous amounts of US Treasuries (and other US fixed income securities and to add to their already enormous stocks to provide the ongoing financial flows needed to sustain the U.S. current account deficit and the Bretton Woods Two system.
Our analysis suggests that the Bretton Woods Two system is fragile, and likely will prove unstable. Even if the United States continues to be able to borrow on terms that other, comparable, debtors could not imagine, our analysis suggests that the U.S. is on anunsustainable and dangerous path.
The basic tools of our analysis may not be familiar to those who follow the American economy. However, they should be familiar to students of emerging economies, who traditionally have had to worry about external sustainability. At the same time, some of the details of the analysis will seem strange to students of emerging economies, since the U.S. is in no way a typical external debtor. Most emerging economies do not have negative real interest rates on their debt, or see their net international investment position as their currency depreciates.
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