US Current Account Deficit: Causes and Concerns

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US Current Account Deficit Causes and Concerns

• Size of US Current account Deficit
• Dollar Terms and as a percentage of GDP

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US Current Account Deficit Causes and Concerns

• What is Causing the Deficit?
• (X M) S(T-G) I
• US is Investing More than it is Saving.

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US Current Account Deficit Causes and Concerns

• Why?
• Irresponsible Consumption?
• Potentially, but savings rates in other countries
  have been declining as well.
• Ideal Investment Climate?
• Better investment opportunities in US, than in
  Asia or Europe (0.75 of every dollar of excess
  savings in the world enters the US).
• But, money inflow does not automatically mean the
  money must be spent on imports (could just go
  into reserves).
• This does, however, help to explain why long-term
  i-rates are low.
• Consumer of Last Resort?

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US Current Account Deficit Causes and Concerns

• Should we be concerned?
• Yes
• Global disequilibrium will cause a crashing halt!
• Eventually marginal benefit of holding US assets
  will decline.
• Foreigners will stop buying US assets. This will
  slow the growth in the pool of savings, thereby
  causing interest rates to begin rising.
• No
• 1/3 Is US companies selling to themselves
• As ROW begins consuming more, this will lead to a
  smooth rebalancing (pressure will be taken off of
  US consumers).
• ROW will not want to see dollar crash because
  loans valued in dollar (US does not suffer from
  original sin).

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US Current Account Deficit Causes and Concerns

• In the end, Current Account Deficit is like sweat
  on your face.

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Oil and the Global Economy
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Oil Prices

• Historical Context

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Source From This is not the next great oil
shock. Financial Times. May 16, 2004
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OPEC

• Formed in 1960, when major oil-exporting
  countries sought to wrestle control and profit of
  their oil away from Seven Sisters Oil
  companies
• Exxon
• Shell
• BP
• Mobil
• Texaco
• Chevron
• Gulf
• Growing Western reliance on oil gave countries
  ability to force concessions from companies
  (precedent set by Libya in 1969 with Oxy).
• Ecuador and Gabon are original members who left
  in 1990.
• Saudi Arabia the worlds oil central banker

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Source EIA. www.eia.doe.gov
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Impact of Oil Prices on the Economy

• Life Blood of the World and US Economy.

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Oil Prices and the United States Economy, 1970 -
2000
Source of data Oil prices from Energy
Information Administration (EIA), U.S. Department
of Energy. Crude Oil Prices 1861-1999 from
British Petroleum. Available at
www.eia.doe.gov/emeu/international/petroleu.htmlP
rices. Real GDP from Federal Reserve Economic
Data (FRED) database of the Federal Reserve Bank
of St. Louis. Available at http//research.stlouis
.fed.org/fred2/data/GDP.txt.
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Impact of Oil Prices on the Economy

• Rules of thumb If a 10 increase in Poil is
  sustained for 1 year, this will decrease
• World GDP Growth Rate by 0.5 percentage point.
• US GDP Growth Rate by 0.3 0.6 percentage point.

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Impact of Oil Prices on the Economy

• Why does Oil Price impact the US economy?
• Thesis 1 Large Consumer!

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Source EIA. www.eia.doe.gov
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Source The Oil Uproar That Isnt The New York
Times. July 12, 2005
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Source EIA. www.eia.doe.gov
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Top 20 Suppliers of U.S. Crude Oil Imports, 2004
Source EIA. www.eia.doe.gov
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Impact of Oil Prices on the Economy

• Why does Oil Price impact the US economy?
• Thesis 2 Feds actions to stop inflationary
  impact of oil shock
• Overall, no evidence.

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Impact of Oil Prices on the Economy

• Why does Oil Price impact the US economy?
• Thesis 2 Feds actions to stop inflationary
  impact of oil shock
• Overall, no evidence.
• However, Fed has kept rates high during times of
  shock (early 1980s and early 1990s).

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Why are Oil Prices Currently High?

• (1) Fourth Oil Shock
• First Demand Shock?
• Rapid Growth of US coupled with Rise of China

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Why are Oil Prices Currently High?

• (2) Inadequate Investment
• Low prices in 1990s led to low incentives
• Little upkeep and little new investment to tap
  more technically difficult reserves (particularly
  in Saudi Arabia)
• High prices have changed incentives.
• New oil supplies will come on-line in 2006/07.
• Could reduce prices dramatically

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Why are the currently High Oil Prices not hurting
the US?

• Three main arguments
• Demand shock, rather than a supply shock.
• It is hurting, because GDP growth rate might have
  been over 5, rather than below 4.
• US is more efficient consumer than during past
  shocks.

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A Survey of Oil

• Look up Economist (London, England 1843
  Online Serials Solutions) on the libraries
  homepage.
• http//library.ohio-state.edu.proxy.lib.ohiostate.
  edu/search/tTheEconomist/teconomist/1,23,29,B/fra
  mesetFFteconomist7,,17
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