(If you were scared by some of my earlier posts following the US currency, you should stay away from this.)
So, one of the interesting questions right now in the field of macroeconomics is: who is funding the US? Brad Setser has a great post outlining some of the aspects of this question.
For example, we know that in 2003 the Asian countries artificially propped up the US currency by putting not only their entire current account surplus, but also an additional $165 billion, into buying dollars. However this year, it looks like the central banks were not increasing their reserves in US dollars nearly as much as last year, but the current account deficit is something like $120 billion bigger (using a figure of $650 billion for the 2004 current account deficit, which might be optimistic). Who is funding this deficit?
Quoting Setser:
More or less all of every major region’s current account surplus ultimately has to find its way back to the US. The US likely accounted for something like $650-660 billion of the $690 billion total current account deficit run up by deficit countries.
Looking more closely at Europe, which at the EU level actually runs a surplus, Setser finds:
Combine the postulated central bank inflow into “Europe” with “Europe’s” current account surplus, and Europe has also almost $300 billion to lend to the rest of the world.
In some way or another, that had to find its way back to the US. The US need for financing is giant sucking sound absorbing all the world’s spare savings.
He looks at a number of possibilities and comes up with a conclusion that makes the question even more interesting–it’s not the central banks that is funding the US deficit:
At the end of the day, the sheer size of the US current account deficit implies that almost all of the rest of the world’s current account surplus has to be lent back to the US. So if the world’s central banks are providing less of the financing the US needs, and supplying financing to Europe that Europe does not need, then some private actors somewhere in the world have to be taking the risks associated with lending to the US in dollars.
Anyway, if you are at all interested, you should take a pass through Setser’s piece.
Then, go look at the more recent piece he’s written to continue working with these ideas, and see what happens when the administration rhetoric says one thing, and their need to secure financing implies another..
