[ Pobierz całość w formacie PDF ]
.The notion that no country can run a sustainable deficit inexcess of 4 or 5 per cent of GDP, or any other arbitrary number, is inEdwards view, nonsense.While this framework offers a very different perspective than the ortho-dox sustainability model outlined in Chapter 6, Edwards himself notes thatthis approach still has important limitations.Equilibrium portfolio sharesremain unknown, while the speed at which a country is able to absorb theincreased demand for its assets can effect the path of the sustainable currentaccount.Nevertheless, the main point that can be drawn from this analyti-cal framework is that sustained swings in portfolio preferences can gener-ate current account positions that, at least relative to the historicalexperience post-1971, look uncomfortably, if not dangerously, large.AsEdwards concludes:The key point is that even small changes in foreigners net demand for thecountry s liabilities may generate complex equilibrium adjustment pathsfor the current account.These current account movements will be necessaryfor the new portfolio allocation to materialize, and will not generate a dis-equilibrium  or unsustainable  balance.However when this equilibrium path 174 Untangling the US deficitof the current account is contrasted with threshold levels.analysts could(incorrectly) conclude that the country is facing a serious disequilibrium.(Edwards, 2002, pp.17 18)In short, as home bias declines, movements in current account positionsthat had previously been regarded as infeasible may be the norm and basicsustainability analysis as set out in the  orthodox case will prove progres-sively futile.A related and important point is that as home bias declines, thehistorical record since the collapse of the Bretton Woods system may beof limited value as a guide to the current situation.Edwards (2005) cor-rectly identifies that there is no doubt that in a post-1971 world of floatingexchange rates the size of US deficits in recent years has been unprece-dented.But compared to other eras this is less true.In the world of rela-tively free capital mobility under the operation of the classical goldstandard before the First World War, current account imbalances, somelarger than those that have usually prevailed in the modern era, werenot unusual.Admittedly, deficits the size of the United States today (rela-tive to GDP) could not be said to be typical, but what has not changed isthat the United States (along with Australia) was a large borrower then, asit is now.Moreover, there is increasing evidence that the dispersion of currentaccount positions has been steadily increasing over the last 15 years or so(Backus et al., 2006).If the US deficit is abnormally large, then Germany,Japan, Norway, Switzerland and, of course, China are running historicallylarge surpluses.Dispersion of current account positions has also expandedwithin the eurozone with Greece, Portugal and Spain running very largedeficits in recent years.1 Heightened capital mobility and a reduction inhome bias as exchange rate risk is removed are obvious candidates toexplain these developments and the decoupling of investment and savingwithin each country (Blanchard and Giavazzi, 2002).The nature of inflows into the United States in recent years is also fre-quently cited as a major cause of concern.There is a significant asymmetrybetween the stock of US overseas assets, which are heavily weightedtowards equity and direct investments, and foreign investments into theUnited States, which are weighted more towards less risky bond and bankfinance.During the dotcom boom of 1997 2001, foreign acquisition ofequities and FDI were significant.Since 2002, net inflows into the UnitedStates have been dominated by foreign purchases of US debt.A furtherchange is that in the past, inflows were primarily private in nature, whereasa sizeable portion of the bond purchases of recent years have been  officiali.e.foreign central bank purchases. The demand for US assets 175OFFICIAL HOLDINGSOne statistic encapsulates the significance of central bank (i.e. official )holdings of reserve assets.Between the end of 1999 and May 2006, theworld as a whole has accumulated US$2.78 trillion in additional foreigncurrency reserves alone.The importance of this figure is revealed by MartinWolf s (2006d) observation that three-fifths of the international reservesaccumulated since the beginning of time have been accumulated in this sixand one-half year period.Table 7.2 details the composition of net capital flows into the UnitedStates since 2003 including the figures for flows in 2006.Note that 2005 didsee a renaissance of net FDI inflows into the USA although this impressionis misleading.This inflow was actually the by-product of the Home LandInvestment Act that encouraged US firms to repatriate profits and divi-dends for domestic investment purposes.The pickup in net flows was there-fore the result of US firms repatriating capital rather than any growth inforeign demand for US real economy assets.Net FDI flows during 2006once again slipped back into negative territory.Viewed from a gross, rather than a net, flow perspective, however, it canbe at least questioned whether net reserve accumulation has financedthe US current account deficit in any meaningful way.Rather it might besaid that these flows have financed the United States substantial outwardinvestments, particularly FDI and portfolio equity, which as Table 7.1 illus-trated have accelerated to almost 5 per cent of GDP on average so far thisdecade.As shown in Figure 7.1, gross FDI inflows into the United States,while well below the 3 per cent of GDP or so pace of the late 1990s, aver-aged in excess of 1 per cent of GDP between the years 2004 to 2006 [ Pobierz całość w formacie PDF ]