Disequilibrium in Global Capital Flows: The US Opportunity

Strategic Insights -

The global economy is experiencing significant disequilibrium due to the mispricing of US assets, leading to an artificially low national savings rate. This situation arises when the proportion of gross domestic product invested is lower in countries with rapidly increasing populations of working age, requiring higher investment ratios in these countries to achieve equilibrium. The US, with its low investment ratio, is particularly vulnerable to this issue. According to a report by Smithers & Co, the only ways to remove this disequilibrium are for the US to have a higher national savings rate than Europe and Japan or for larger capital flows into the US.

Key Takeaways:

  • The global economy is experiencing a significant disequilibrium due to the mispricing of US assets, with a low national savings rate and artificially low investment ratio.
  • The disequilibrium is caused by the proportion of gross domestic product invested being lower in countries with rapidly increasing populations of working age, requiring higher investment ratios in these countries.
  • The US has a low investment ratio compared to Japan and Europe, making it particularly vulnerable to this issue.
  • To remove the disequilibrium, the US needs a higher national savings rate than Europe and Japan or larger capital flows into the US.
  • Land capital flows into the US do not represent a disequilibrium as commonly asserted, according to life cycle savings models.
  • Martin Wolf's article challenging the view does not address the argument that the mispricing of US assets discourages private capital flows and requires public sector flows to finance the US deficit.
  • The disequilibrium situation is not improved by attempting to reduce the US current account deficit.

Statistics:

  • US national savings rate is too low, indicating a significant disequilibrium.
  • The investment ratio in the US is lower than in Japan and Europe, contributing to the disequilibrium.
  • A net foreign ownership of US assets by 2009 of 15% could be unstable, but has no theoretical or practical support.
  • Many countries have or have had higher ratios of foreign ownership, indicating no practical support for this contention.
  • The US borrows in its own currency, exposing foreign lenders to risk.
  • Reducing the US current account deficit through attempts would worsen the world's economic problems.

Sources:

  • Smithers & Co
  • Martin Wolf's article, "Our currency, but your problem", March 1
  • Life cycle savings models