Global Macro Monitor

Given all the noise around the Trump Tariffs,  we have updated our ranking of the world’s 2018 Current Account Balances (CAB) by country from largest surplus to biggest deficit, both as a percentage of GDP and in US$ billions,  in the ginormous table below.  The data are estimates from the October 2017 IMF’s World Economic Outlook database.

However, first, check out the current account balances of the G20.  We suspect Germany will be under increasing pressure from the Trump administration to reduce its surplus, which is mainly the result of the country’s high savings rate.

Let us begin with a little primer on how the current account balance is determined.

We posted this in January 2017,  before President Trump was inaugurated.

Trump Fiscal Policy and the Current Account Deficit
If President Trump succeeds in implementing his proposed tax cuts and $1 trillion infrastructure spending plans,  the U.S. current account deficit, by definition, will, once again, balloon as net public savings will decline and, we believe, will be complemented by a decline in net private savings as business investment and private consumption increases.  This is the simple national income identity,

(S-I) + (T-G) = Current Account Balance (Foreign Savings)

 (S-I) is the ‘private savings balance’ or the difference between private sector savings (S) and investment (I); (T-G) is the ‘government balance’ or the difference between tax receipts (T) and all government expenditure (G); (X-M) is the difference between exports (X) and imports (M) and is usually called the simple ‘current account balance’.  – George Irvin

President-elect Trump does not  like trade deficits, and we suspect he will be perplexed by the continued deterioration of the current account deficit caused by his macro policies.  This risks that his administration may implement even greater international trade distortions to try and reduce the trade deficit.

The U.S. current account deficit is indeed deteriorating,  not because of unfair trade practices but because of domestic economic imbalances.   Somebody call Peter and Wilbur.

Public Savings,  Government Budget Deficits, And The Current Account

The following scatter plot attempts to illustrate the relationship between net public savings and the current account.  It does not include net private savings, generally a  larger factor in the relationship.   We have omitted some extreme outliers (45 percent CA surplus, for example).  The trend line does shows a clear positive relationship.

Current Account Surplus = Foreign Savings

Finally, the ginormous table on country current account balances.

We have also added the U.S. Treasury holdings of most of the top 20 surplus countries.  A country’s current account surplus is simply excess savings shipped abroad, mainly recycled into U.S. Treasury securities, since the dollar is the main reserve currency,  which helps to keep interest lows in the United States.

In fact, as of the end of 2017,  36 percent of all marketable Treasury notes and bonds, excluding the Fed’s holdings, were held by 16 of the top 20 current account surplus countries, of which China and Japan hold almost 25 percent.

Given the U.S. high dependence on foreign savings to finance everything from consumption, infrastructure and budget deficits,  there will be much macro wrenching and shrinkage of foreign financing if policymakers resort to gimmicks and artificial measures to reduce the trade and current account deficit.

The policymakers should focus more on sustainable policies to increase private and public savings.

Amen.

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