Monday, May 7, 2012

One Way the US is like the PIIGS

A good way of thinking about at least some of the PIIGS country troubles is as primarily current account crises - these countries borrowed too much from foreign lenders.  Some (Spain) mainly did this through the private sector, while others (Greece) did it extensively through public sector borrowing.  But in either case the countries engaged in unsustainable capital inflows.  When the music eventually stopped they were left with painful crises to deal with.

This framework has been emphasized by Paul Krugman for instance who says
What we’re basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe. It’s not a perfect fit — Italy managed to have relatively high inflation without large trade deficits. But it’s the main way you should think about where we are.
To assess this, here is the current account balance (as a percentage of GDP) for the PIIGS countries, together with Germany, France, and Holland for European contrast, and the US and China for broader contrast:

You can see that indeed Portugal, Greece, and Spain very much look like this: countries that ran large current account deficits for well over a decade.  Ireland only ran a much smaller deficit more recently, and Italy's problems are mainly high public debt from earlier times, rather than large recent inflows.

Note that the US has also been running significant current account deficits for a long time.  Like the PGS trio, we still are.  Also like them, the deficits have moderated somewhat since the crisis of 2008.

It's easier to see if we just add up the deficits/surpluses across the years to get the accumulated balance since 1995:

This is not a perfect procedure: 1995 is roughly the start of the modern pattern in current account flows, but it's still somewhat arbitrary and accumulating deficits since then tells us nothing about the relative shape of countries at that time.

Still, it's interesting that the scale of the deficits the US has accumulated, relative to the size of our economy, are not far from Spanish levels.


Burk said...

Yes, and?

Spain borrows someone else's money, so they have solvency risk. We, in contrast, borrow in our own issued currency and thus have zero solvency risk and associated instability.

What we do have is inflation risk, were we to issue too much to cover these outflows. How is inflation going? Not a problem, in light of the implosion of private money/debt. You are comparing apples and oranges.

Black Lines on White Paper said...

The second graph does not make any sense because GDP changes every year so you can ad up its percentage from one year to the next, they represent completely different things, much less from one year to another 15 years later. Much less you can compare different countries because the rate of variation of GDP is also different between them.

Regarding Burk Braun comment, the euro is as much an Spanish currency as the dollar is the currency of California.

ColdNorth said...

At a certain point it will become clear to lenders that the US government is using their wealth to run public operations. In times past shortfalls in government spending could be dealt with by raising taxes. Thanks to trans-national competition for investments governments feel unable to raise taxes to directly cover operational costs - thus borrowing without meaningful growth.

The thing about borrowing and debt is the lenders have to believe they will get their money back. All is good until they don't.

Will US citizens valiantly buy the their nation's debt once it is clear that the prospects of repayment are slim. I think not, and also think that US citizens as much less patient with their government than Japan (i.e., debt at 200% of GDP is extremely unlikely).

Heterosensible said...

"Regarding Burk Braun comment, the euro is as much an Spanish currency as the dollar is the currency of California. "

There's a big difference between currency *users* and currency *issuers*. Since neither California nor Spain issue currency you can't really say that the currency they use is "their" currency.

I have dollars in my wallet that I will use soon enough, but that doesn't mean that the dollar is "my" currency.