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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary. Each article or essay is selected on the basis of its long-term relevance for understanding the role gold plays in the individual's portfolio, the overall political economy, or both.
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America's Deficit, the Dollar & Gold
by Tim Congdon
World Gold Council Reserch Study No.28
Professor T. G. Congdon, CBE is one of Britain's leading economic commentators. He was a member of the Treasury Panel of Independent Forecasters (the so-called "wise men") between 1992 and 1997, which advised the Chancellor of the Exchequer on economic policy. He founded Lombard Street Research, the City of London's leading economic research and forecasting consultancy, in 1989, and is currently its Chief Economist. He has recently been appointed to a research professorship at Cardiff Business School, where he will be writing a book on The Monetary History of the UK, 1945 - 2001. He is also a visiting professor at City University Business School. He has written a number of books on monetary policy, contributes widely to the financial press, and makes frequent radio and television appearances. He was awarded the CBE for services to economic debate in 1997.
Click the following to access an abridgement of this commentary: 'Executive Summary'.
Contents -- America's Deficit, the Dollar & Gold
---> 1 : Introduction: Can the dollar remain the world's dominant currency?
---> 2 : Trends in the USA's external payments
-- Trends from 1945 to the suspension of the dollar's convertibility into gold in 1971
-- Trends from 1971 to 1991, the last year of current account surplus
-- Trends in the 1990s
-- Summarizing trends in the USA's external payments since 1945
---> 3 : How easily can the USA achieve sustainability in its external payments?
-- Trying to define "sustainability"
-- The algebra of debt sustainability
-- Achieving sustainability
-- How much strain will the shift into net exports impose on the US economy?
-- Appendix to Chapter 3
---> 4 : Is a big fall in the dollar needed?
-- Some theory: "expenditure-reduction" versus "expenditure-switching" to correct external deficits
-- Policy options
-- Heavy fall in dollar is inescapable
---> 5 : Can the coming slide in the dollar be reconciled with its status as the world's dominant reserve currency?
-- Why do nations hold foreign exchange reserves?
-- The coming slide in the dollar: how will it affect the demand for the dollar as a reserve asset?
-- Will gold become more attractive as a reserve asset?
1.
Introduction: Can the dollar remain the world's dominant currency?
With the USA accounting
for over a quarter of global output, American economic leadership
is an established feature of the international financial scene
at the start of the 21st century. The dollar is accepted as the
world's main currency, and it dominates both governments' reserve
holdings and trading on the foreign exchanges. But in one key respect the
dollar looks vulnerable.
In the last few years the USA has run a vast current account deficit
on its balance of payments. The deficit has been the largest in
money terms, and the highest as a share of gross domestic product,
in American history; it has also dwarfed the largest deficits
incurred by other nations, including nations that have been a
byword for financial mismanagement and bankruptcy.
Further, as shown by Chapter 2 in this study, the deficit is not
new. The story of the USA's external payments since 1945 is one
of a remorseless slide, from a massive trade surplus and a commanding
status as the world's biggest creditor in the late 1940s, to the
erosion of the surplus and the emergence of a trade deficit in
the 1950s, 1960s and 1970s, to an increase in overseas obligations
which reduced the surplus on investment income in the 1980s, and
finally to the unprecedented trade deficits and the position of
the world's biggest debtor today.
A vital question raised by the USA's external debt and deficits
is, "can the dollar remain the world's dominant currency,
and in particular the favourite asset in government holdings of
foreign exchange reserves, while the USA continues to build up
external liabilities at the recent rate?" Further, if the
dollar's pre-eminence is weakened by the USA's external imbalances,
"what other reserve asset can compete with it?" These questions have
become more relevant with
the introduction of the single European currency, the euro. Several leading European statesmen
have said -- openly and in forthright terms -- that one aim of
the euro is to supplant the dollar as the world's principal currency.
The dollar's prospects are also fundamental to the future monetary
role of
gold. Gold has diminished
sharply as a share of international reserves since the 1970s.
Although many explanations could be provided for the reduced official
demand for gold, undoubtedly important have been the decline in
inflation and the restoration of respect for paper currencies.
Under the guidance of two outstanding chairmen of the Federal
Reserve, Paul Volcker and Alan Greenspan, American monetary policy
has successfully lowered the USA's inflation rate and so, by example,
played a central role in the reduction of inflation around the
world. Are the USA's large external deficits a sign of a weakening
of anti inflationary resolve? Do they foreshadow a collapse in
the dollar? And would a collapse in the dollar not only benefit
the euro's international prestige, but also renew gold's monetary
role?
These are the some of the questions which the present study tries
to answer. The questions are not new. Indeed, an argument could
be made that they have been inherent in the post-war international
financial system. The USA has been expected to create easily traded
financial instruments, including large and ever-growing dollar balances,
to meet the world's rising demand for liquidity. But to create
such balances it has to incur external deficits and the deficits
undermine the dollar's credibility.
This tension -- between the need for deficits to provide the world
with claims on the USA and the risk that such deficits makes the
claims unattractive to hold -- was brilliantly described in Triffin's
Gold and the Dollar Crisis. (1) The book emphasised "the
Triffin paradox", that the USA could not indefinitely expand
the world's dollar holdings and maintain the convertibility of
the dollars into gold as the fixed price of $35 an ounce. Published
in 1960, Triffin's book anticipated the suspension of the dollar's
convertibility into gold (in August 1971) by over a decade.
Of course, the
situation today is very different
from that in the late 1950s and early 1960s when Triffin was writing,
but a link remains between the quality of the USA's management
of its currency and the appeal of non-dollar assets, including gold, to international investors. As this
study will demonstrate, the scale of the USA's external deficits
in recent years has undoubtedly given new relevance to long-standing
questions about the dollar's international role.
Note
(1) Robert Triffin Gold and the Dollar Crisis (New
Haven: Yale University Press, 1960).
2.
Trends in the USA's external payments
Trends from 1945 to the suspension of the dollar's convertibility
into gold in 1971
In 1945 and the immediate post-war years the USA enjoyed a huge
economic advantage over the rest of the industrial world. Japan
and most European countries had suffered significant damage to
their productive capacity from direct military action, quite apart
from the strain of having had to commit so much of their resources
to re-armament and the war effort over several years. The USA
accounted for over a third of world output, making it the dominant
market for raw materials of all kinds as well as the only supplier
of many key products. Not surprisingly, it built up substantial
financial claims on other countries, in the expectation that eventual
economic recovery would enable them easily to service and perhaps
to repay their debts. American companies also invested heavily
around the world, exploiting an undoubted technological and managerial
superiority over smaller, less efficient foreign competitors.
In 1946 the USA's exports of goods were more than double its imports;
in 1947 its exports of goods exceeded its imports by over two-and-a-half
times. On trade in services also it ran an immense surplus. The
overall surplus on the current account of its balance of payments
was $4.9bn in 1946 and $9.0bn in 1947, both figures larger than
the gross domestic product of Italy at that time. (See Table 2.1
on the USA's balance of payments in 1946.) Yet such was the scale
of the USA's economy that 1947's current account surplus was less
than 4% of its own GDP. Because the USA had generally recorded
a surplus on the current account of its balance of payments in
the first half of the 20th century, its overseas assets dwarfed
those of other countries. The United Kingdom -- which had been similarly placed only 40 years earlier -- had been forced to sell the bulk
of its overseas assets in order to cover heavy external deficits in the two world wars. Negotiations
between the USA and the UK about the institutional framework of
post-war international relations took it for granted that the
USA was the world's dominant creditor nation. In the resulting
Bretton Woods system the dollar and the pound sterling were the
two reserve currencies, but in reality the dollar was pre-eminent.
Some rebalancing of the world
economy over the next two or three decades was to be expected,
as Europe and Japan returned to pre-war levels of output. The
scale of the American lead in the late 1940s was exceptional and
could not last. In the event economic growth in Europe and Japan
in the 25 years from 1950 ran at an unprecedented rate, removing
much of the initial gap between them and the USA in output per
head and living standards. The post-war liberalizations of trade
and payments encouraged nations to specialize in areas of comparative advantage, which reduced the diversity of their
production as they concentrated on products to be sold in foreign markets. The reduction in tariff barriers by
the USA was an important part of the wider process and stimulated
rapid growth in its imports.
In fact, the USA's imports of goods grew far more than its exports
-- with only occasional cyclical interruptions -- throughout the
period of Europe's post-war economic renaissance. In the 25 years
from 1946 imports rose over nine times from $5.1bn to $45.6bn,
whereas exports increased less than four times from $11.8bn to
$43.3bn As a result, the in 1971 USA recorded its first deficit on trade
in goods since the nineteenth century.
Nevertheless, trade in services was roughly in balance and a substantial
surplus had been achieved in investment income. This surplus on
investment income was the USA's return on the assets it had accumulated
in the first three-quarters of the 20th century. American investments
around the world, and the profits on those investments, benefited
hugely from post-war prosperity. In 1946 the USA's surplus on
investment income was under $0.6bn; in 1971 it was $7.3bn The
favourable trend in investment income was a valuable offset to
the slide into deficit on trade in goods.
Table 2.2 shows the structure of the USA's balance of payments
in 1971. The pattern was far less imposing than in 1946, but the
underlying strength of the USA's external position seemed not
to be in doubt. As in the three previous post-war years when the
USA had run a current account deficit (1950, 1953 and 1959), the
imbalance could be blamed on "unilateral transfers",
principally spending around the world by the US Government on
military assistance to allies, aid, payments to the multilateral
agencies and so on. Excluding such transfers, the USA continued
to have a meaningful current account surplus.
Although the USA remained a
big creditor nation in 1971, the erosion of the current account
position since the early post-war years undermined international
confidence in the dollar. The USA's money supply growth had also been rather high in the late 1960s,
so that the world economy arguably had "too many dollars."
(1) As the world's central banks wanted to increase the proportion
of their assets in gold, they asked the US Government to exchange
their surplus dollars into the precious metal. The consequent
drain on
the USA's gold reserves
forced it to suspend the convertibility of the dollar into gold,
removing a foundation stone of the Bretton Woods structure. Whatever
the exact causes of the dollar's fragility in the late 1960s and
early 1970s, the episode demonstrated the relevance of trends
in the USA's external payments to international perceptions of
the dollar, both against other currencies and against the ultimate
reserve asset, gold.
Trends from 1971 to 1991, the last year of current account
surplus
The elimination of the USA's vast payments surplus between
the immediate post-war period and the early 1970s could be interpreted
as mostly due to the restoration of peacetime normality. The USA
continued to record current account surpluses for most of the
1970s. Because of substantial domestic oil production, it was
less badly hit by the two oil prices shocks, of 1973/4 and 1979/80,
than other industrial countries. With the value of its international
assets still rising strongly, the surplus on investment income
became even more impressive. By 1980 receipts of international
investment income of $72.6bn exceeded payments of $42.5bn by just
over $30bn.
However, the accumulation of new foreign assets now relied on
the re-investment of profits, dividends and interest from old
investments. In the 1970s, as in the 1950s and 1960s, the USA's
imports grew more rapidly than its exports. In the early 1970s
trade in goods and services was sometimes in surplus and sometimes
in deficit; in the
late 1970s it was in deficit year after year. The current account remained in surplus only
because of the buoyancy of international investment income. The
apparent entrenchment of a trade deficit was accompanied by unconvincing
monetary policies, with the USA's Federal Reserve overshadowed
by the German Bundesbank and the Swiss National Bank in the commitment
to sound money. The dollar lost half its value against the Swiss
franc between 1973 and 1979, and also fell heavily against the
German mark and the Japanese yen. High inflation rates around
the world hit confidence in paper money. The dollar price of gold
-- still officially $35 an ounce in early 1971 -- averaged $614.50
in 1980 and briefly touched $850 in
January 1980. Gold
was favoured as an investment
vehicle because in several industrial countries the rate of inflation
exceeded the interest rate on deposits, implying a negative real return
on money balances.
Mr. Paul Volcker was appointed Chairman of the Federal Reserve
Board in 1979, with the task of curbing American inflation. In
the year to December 1979 the USA's consumer price index rose
by 13.3%. Volcker recognized that a sharp rise in interest rates
was needed, both to restore a real return to savers and confidence in paper
money, and to dampen excessive
growth of credit and money. The Federal Reserve limited the quantity
of reserves supplied to the US banking industry, letting the critical
fed funds rate find a market-clearing level. In 1980 and 1981
it bounced around from month to month, but was typically in the
teens. US banks' prime rates -- which had to give a profit margin
above the fed funds rate -- reached 20% in March 1980, exceeded
20% in December 1980 and stayed at over 20% for most of 1981.
These very high real interest rates came as a shock to borrowers.
As intended, they did lead to lower money supply growth and inflation
in 1981 and 1982; they were also vital in lowering medium-term
inflation expectations and restoring confidence in American economic
policy-making. However, in the process of making the dollar once
more attractive to hold compared with gold and other assets, they
also caused it to appreciate sharply on the foreign exchanges.
The dollar was strong until early 1985, when its exchange rate
against the German mark, the Swiss franc and the Japanese yen
had recovered to values similar to those in the early 1970s.
Unfortunately, inflation in the USA had typically been higher
than in Germany and Japan. The dollar's appreciation therefore
made it heavily over-valued and handicapped American exporters
in world markets. The USA's imports of goods jumped from $249.8bn
in 1980 to $368.4bn in 1986, whereas its exports of goods in 1986
of $223.3bn were slightly lower than 1980's $224.3bn. The surplus
on services also narrowed a little in these years. The deficit on trade in goods and services combined -- which
had been only
$19.4bn in 1980 -- climbed
to $139.8bn
in 1986 and $152.8bn in 1987.
The surplus on investment income remained the bright spot in the
USA's international accounts in the early 1980s. The surplus on
investment income moved ahead further from $30.1bn in 1980 to
a peak of $36.3bn in 1983. But the sequence of current account
deficits implied that foreigners were accumulating financial claims
on the USA to a greater extent than the citizens of the USA were
accumulating claims on the rest of the world. According to estimates
prepared by the Department of Commerce, in 1985 the value of assets held by
foreigners in the USA exceeded the value of assets held by US
citizens abroad. The USA's
"net international investment position" had become negative
for the first time since the First World War.
The USA nevertheless continued to enjoy a surplus on investment
income. The combination of the surplus on international investment
income and the shortfall on international assets may seem anomalous,
but can be partly explained by the importance of foreigners' holdings
of low-yielding equities in their claims on the USA. At any rate,
the surplus on investment income began to fall. It went down from
$36.3bn in 1983 to $14.2bn in 1987. With the deficit on trade
and services now well established and the surplus on investment
income under threat, alarming projections could be made of an
ever-growing current account deficit.
In these circumstances key American policy-makers -- notably the
Treasury Secretary, Baker -- worried about the eventual damage
to their country's international financial standing if the current
account deficit were not corrected. At a meeting in the Plaza
Hotel, New Your, in September 1985 the major industrial countries
agreed on concerted policies to lower the dollar's exchange rate.
As the dollar had in fact already peaked in early 1985, the Plaza
agreement accelerated its downward trend. In 1985 its average
value against the German mark was 2.942 and against the yen 238.47;
in 1988 the average value against the mark was 1.757 and against
the yen 128.17.
The policy-induced collapse in the dollar did have the desired
effect on trade flows. Between 1986 and 1991 both the value and
the volume of exports grew faster than those of imports. The impact
on trade in services was particularly clear. For example, where
as the balance on travel and transport receipts was almost $10bn
in the red in 1985, it was in surplus by over $15bn in 1991. Meanwhile
the drop in the dollar increased the dollar value of the USA's
receipts from its international investments. The surplus on investment
income doubled from $14.2bn in 1987 to $28.4bn in 1990. A further
more adventitious boost came in 1991, when
the USA asked its allies in the industrial world to contribute
to the cost of the heavy defense expenditure incurred in the Gulf
War. In that year the current
account recorded a small surplus of $4.3bn The surplus followed
nine consecutive years of deficit,
in which the cumulative shortfall had totalled almost $900bn.
Trends in the 1990s
The surplus in 1991 reflected and may have seemed to justify
policy-makers' efforts to devalue the dollar since 1985, but it
was also a by-product of cyclical fluctuations in the American
economy. The dollar's big devaluation in 1986 and 1987 had aggravated
domestic inflation pressures, taking the annual increase in the
consumer price index up from 1.1% in December 1986 to over 4%
during 1988 and 6.1% in December 1990. The Federal Reserve --
now under the chairmanship of Mr. Alan Greenspan -- tightened
monetary policy with a sequence of interest rate increases, with
Fed funds rates rising from 6.75% in late 1987 to almost 10% in
the spring of 1989. In the usual cyclical manner the growth of
demand and output slowed, and a recession was recorded in the
fourth quarter of 1990 and the first quarter of 1991.
This recession -- although mild -- lowered the USA's appetite
for imports and was an important influence on the favourable swing
in the USA's external accounts. Growth resumed in late 1991 and
1992. The revival in demand was not particularly strong, but it
was sufficient to reverse the improvement in the external accounts.
A current account deficit of over $50bn re-emerged in 1992, and
it increased to $50.6bn in 1993 and $85.3bn in 1994. Once again,
the USA's
imports were rising faster than its exports. In fact, the deficit on trade in goods widened relentlessly,
year after year, in the 1990s.
The deficit on trade in goods and services could not resist the
adverse trend on trade in goods. It also rose steadily throughout
the 1990s, apart from one year (1995) when a bout of dollar weakness
gave the USA's industries a temporary competitive boost.
The cumulative deficit on trade in goods and services in the six
years from 1992 to 1997 was over $500bn and on the current account
almost $650bn. By the end of 1997 the USA's foreign assets were
greatly exceeded by its foreign liabilities, with the Commerce
Department estimating the gap to be roughly $1,000bn.(2) In 1998 payments of
investment income on foreign-owned assets exceeded the USA's investment
income receipts for the first time in the post-war period. The investment income deficit was
minor compared with other elements in the USA's external accounts
at only $12.2bn, but the loss of the investment income surplus
was another
stage in the erosion of the USA's international creditor status. Less than 20 years earlier the investment
income surplus had been equal to 1% of GDP.
Despite the clear adverse trends
in international flows of both trade and investment income, the
late 1990s was a period of great investor enthusiasm for American
assets. This enthusiasm owed much to the success of American entrepreneurs
in developing new computer, telephone and information technologies,
which encouraged talk of a "New Paradigm" of endless
prosperity. Heavy capital inflows into the USA reflected investor
excitement about the New Paradigm and made it easy to finance
the current account deficit. The spread of American investment
banks and news media around the world reinforced the image of
the USA as the dominant participant in the world economy.
American leadership was obvious, even obtrusive, in the summer
of 1997.
A severe financial crisis erupted in South-East Asia, following the failure of the Bank
of Thailand to prevent a devaluation of the baht in July. Share
prices fell heavily around the world, and for a few weeks in October
and November the bond market was virtually closed as a source
of corporate funding. Mr. Greenspan decided that the USA had to
act as "importer
of last resort" to the world economy. The Federal
Reserve cut interest rates to boost demand in the USA. The deliberate intention was to stimulate
purchases from the over-indebted countries of South-East Asia
and Latin America, and so to overcome their balance-of-payments
difficulties.
But the result
was to widen yet further the USA's trade and current account deficits. Indeed, the slide into deficit in
the late 1990s was far more rapid than at any other time in the
post-war period. Using national accounts data in constant price
terms (i.e., 1996 prices), in the second quarter of 1997 "net
exports" -- the excess of exports of goods and services over
imports -- were negative by 1.2% of GDP. Three years later they
were negative by 4.5% of GDP. Even the slide into deficit in the
early 1980s had not been so abrupt. In terms of actual numbers
on a balance-of-payments basis, the deficit on trade in goods
and services widened from $24.2bn in the second quarter of 1997
to $41.6bn in the second quarter of 1998, when the Asian crisis
broke, and then quarter by quarter to $86.2bn in the first quarter
of 2000. The monthly trade deficits by mid-2000 were as large
as the quarterly trade deficits only three years earlier. The
wider trade deficit added to the current account deficit, while the sequence of
large current account deficits increased foreign claims on the
USA. Inevitably, the deficit on investment income also became
larger. In the fourth quarter
of 1999 and the first quarter of 2000 combined, the deficit on
investment income was almost $10bn, equivalent to $20bn at an
annual rate.
In spring 2000 the stock market -- particularly the fashionable
high-tech sectors which had benefited from the New Paradigm talk
-- began to fall. The USA's widening external deficit was one
reason for disappointment about American economic performance,
although it did not play a major role in the public debate. In
late 2000 and early 2001 the slide in the stock market undermined
consumer confidence and deterred companies from raising cash by
new equity issuance. Business investment fell heavily, leading
to a mini-recession in the middle of 2001.(3) The fall in demand
curbed imports and led to a narrowing of the trade gap, in the
usual cyclical manner. The trade deficit, which had been $99.7bn
in the fourth quarter of 2000, was down to $85.0bn in the fourth
quarter of 2001. But the trade gap did not return to where it
had been before the Asian crisis began in 1997 and remained extraordinarily
large by any standards other than those of the late 1990s. As
the US economy began to recover in early 2002, the trade figures
deteriorated once more. The lowest monthly value of the trade
deficit in 2001 had been in September, at $19.4bn, but in February
it was back to $31.5bn, similar to the highest deficit numbers
seen in 2000.
Summarizing trends in the USA's external payments since 1945
This narrative account of trends in the USA's external payments
in the second half of the 20th century has identified a persistent erosion
of the creditor position held by the USA in the immediate post-war
years. In the late 1940s
the USA had a surplus on trade in goods, and a larger surplus
on trade in goods and services. Further, because it had acquired
substantial foreign assets in the first half of the 20th century,
it had a surplus on international investment income. The overall
surplus on the
current account -- the sum of the trade surplus and the surplus
on investment income (only
slightly qualified by a deficit on transfers
which reflected the USA's great power role) -- appeared structural
in nature. It was self-reinforcing year by year because the assets
bought with the surplus implied increased surpluses on the investment
income account. Further, there was a powerful economic justification
in the world's most technologically advanced nation spreading
its expertise to other countries by investing in them and acquiring
claims on their future output. In 1950 the USA's creditor status
seemed impregnable.
Over the next 50 years everything changed. Between 1950 and the
early 1970s imports grew faster than exports, with only occasional
cyclical interruptions. 1973 was the last year that the USA had a surplus
on trade in goods and services.
The slide in this part of the international accounts was nevertheless
largely offset by a healthy and growing surplus on investment
income, and even in the early 1980s the current account was roughly
in balance. A possible sustainable outcome would have been for
the USA to stabilize both the trade deficit and the surplus on
investment income as proportions of GDP. This would have been
a logical situation for a mature industrial nation, able to live
off foreign assets built up in its years of overwhelming technological
supremacy. Instead extraordinarily high interest rates were required to
restore faith in the dollar as a sound currency, after the shock of double-digit peacetime inflation
rates in the 1970s. The resulting dollar over-valuation hampered
US exports, and the gap between exports and imports widened again.
A deficit on the current account -- as well as on trade in goods
and services -- became the norm. Despite the return to a more
sensible dollar valuation in the late 1980s and a brief recession
at the start of the 1990s, the USA was able to achieve only a few quarters of surplus
in 1991. Thereafter a current account deficit was recorded year
after year.
Whereas in 1947 the USA's exports of goods were more than two-and-a-half
times its imports, in 1999 its imports of goods exceeded its exports
by over 50%; whereas in the late 1940s the USA's surplus on goods
and services w as typically 3% - 5% of GDP , in 1999 the deficit
on goods and services was of almost the same size relative to
American national output, at 2.9% of GDP. Inevitably the sequence
of current account deficits caused the USA's foreign liabilities
to overtake its assets. By 1998 its payments of international
investment income also exceeded its receipts; by early 2000 the
deficit on investment income was running at an annual rate not
dissimilar to the typical surpluses recorded on this item in the
previous 20 years.
To summarize, over 50 years a surplus on trade in goods had become
a deficit, a surplus on trade in goods and services had become
a deficit, a surplus on investment income had become a deficit,
a persistent current account surplus had become a persistent deficit,
and a substantial excess of foreign assets had been replaced by
a substantial excess of foreign liabilities. Whereas in the middle years
of the 20th century the USA was the world's dominant creditor
nation, by the century's end it was the biggest debtor nation. Moreover, no signs of a stabilization
of the payments position had yet emerged. At mid- 2000 the USA's
current account deficit exceeded 4% of GDP and was by far the
highest figure on record. Although the deficit fell slightly in
the mini-recession of 2001, the fall was insignificant compared
with the increase in the deficit in the previous decade. At the
start of the 21st century it is realistic to forecast that the
USA will soon register a current account deficit of almost 5%
of GDP.
Notes
(1) A key theoretical
uncertainty is whether the exchange rate depends more on a nation's
external payments position or on relative money supply growth.
The phrase "too many dollars" could be justified either
by a wide payments deficit or by rapid money supply growth. The
point is taken up in Chapter 5.
(2) Note that the Department of Commerce's estimates of the USA's
net international investment position change every year. For example,
whereas it was originally thought that the USA became a net debtor
in 1985, the latest assessment is that this occurred in 1986 or
1989. (The date depends on the valuation method adopted. See Harlan
King, 'The international investment position of the United States
at year-end 2000', pp. 7 - 15, July 2001 issue of Survey of
Current Business [Washington: Department of Commerce].)
(3) The downturn of 2001 was not a full "recession,"
because GDP fell in only one quarter, not in two consecutive quarters.
[Editor Randy's note:
Unless you fancy yourself a budding economist, you may find Section
Three lengthy and dry, and may risk bogging down. I might encourage
you to jump ahead to Section Four by clicking here without shame.]---> 4
3.
How easily can the USA achieve sustainability in its external
payments?
Trying to define "sustainability"
One of the big problems in discussing the USA's international
payments position is that the word "sustainability"
can take a variety of meanings. It is plain that the situation
is unsustainable either when the current account deficit is rising
year after year or when imports are constantly increasing at a
faster rate than exports. But that does not finalise matters,
as the USA's circumstances in the late 1990s were undoubtedly
extreme. To say that the USA must eventually limit the ratio of
the current account deficit to its gross domestic product, in
order to restore external sustainability, is correct. But this
statement does not spell out when and at what level of the deficit-to-GDP
ratio the limit has to be imposed. More careful analysis is required
to define the boundary between sustainability and unsustainabilty.
An essential starting-point is to emphasise that the existence
of a current account deficit is not, in itself, a sign of unsustainabilty.
It is not true that nations with payments imbalances will confront
an inevitable Day of Judgement when the debts have to be repaid
and the deficits must be replaced by surpluses. Indeed, some countries
-- such as Australia or New Zealand -- have had current account
deficits ever since they were established as definable national
entities. Typically, foreigners own a large part of the capital
stock of a country of this kind, which therefore has a significant
deficit on investment income. The current account deficit represents
foreign investment in the country and implies ever-increasing
external claims on its future output. But its citizens are pleased
because domestic expenditure exceeds domestic output and overseas
investors are happy because they are receiving sizeable investment
income. Part of this income they can consume and part of it they
can re-invest. Viable examples can be proposed, in which external
indebtedness reaches remarkably high levels and yet the situation
is sustainable. In the extreme foreigners could own a nation's
entire capital stock and receive all its investment income, and
still the ratio of the capital stock (and hence the external debt)
to output could be stable.(1)
Because of these examples, stability in the ratio of external
debt to output could be suggested as a more relaxed, but much
better criterion of sustainability than the elimination of current
account deficits. With this criterion accepted, most analyses
of the dynamics of external debt distinguish between two parts
of the deficit (i.e., the increase in debt). One part is attributable
to payments of income, typically interest, on the debt, while
the other is attributable to all other payments between the debtor
nation and its creditors. The second element is usually termed
"the primary balance." The contrasting roles of debt
interest and the primary balance in the evolution of debt become
two actors in a mathematical drama of financial damnation or redemption.
The algebra of debt sustainability
With a stable debt-to-income ratio accepted as a criterion
of sustainability, these analytical concepts are readily applied
to the American external payments deficit. The balance on investment
income corresponds to "debt interest" in naïve
theoretical statements of debt dynamics, and the sum of the trade
deficit and unilateral transfers to "the primary balance."
Two simple formulae can be derived for the ratio of the current
account deficit to national output that would stabilize the debt/output
ratio, and for the associated split of that deficit between investment
income and the primary balance.
Let D represent a nation's net external liabilities
( or "debt") and Y
represent its output. Let the debt/output ratio be denoted by a.
Then
D/Y = a, and
D = aY.
Let the change
in debt be denoted by dD and the change in output
by dY. Then the growth rate of debt is dD/D and the growth rate of output is dY/Y, denoted by g.
If the ratio of debt to output is stable, then the growth rates
of debt and output must be the same. So
dD/D = dY/Y.
Now, for the sake of analytical tractability, the change in debt dD may be taken as the same thing as the
current
account deficit and dD/Y
is the ratio of the current account deficit to national output.(2)
So
dD/Y x Y/D = dY/Y.
Remembering that Y/D is the inverse of a, and multiplying both
sides of this expression by a, the key result emerges that
-- when the ratio of net external liabilities to output is stable
--
dD/Y = g x a.
In words, the ratio of the current account deficit to national
output that stabilizes the debt/output ratio is the debt/output
ratio multiplied by the economy's growth rate.
What of the split between "the primary balance" and
"debt interest"? Assume that a uniform interest rate, denoted by r, is
paid on net external liabilities (3). Then debt interest is rD and the primary balance is (dD - rD).
After a little manipulation, the expression for the primary balance
becomes (g - r) x D. So the two components of the current
account deficit -- the two actors in the drama of debt sustainability
-- can be put together as follows,
dD = rD + (g - r)D.
Further, the ratio of the current account deficit to national
income that stabilizes the debt/output ratio is
dD/Y = ra + (g - r)a.
In words, the sustainable ratio of the current account deficit
to national income is the sum of, first, the rate of interest
on external debt multiplied by the ratio of debt to output and,
secondly, the growth rate minus the rate of interest, also multiplied
by the ratio of debt to output.
One crucial point quickly emerges. Perhaps surprisingly, it is
not true that a country with net external liabilities must
have a trade surplus to keep those liabilities stable relative
to national output (4). If the economy's growth rate exceeds the interest
rate on its liabilities,
then the equation says that trade deficit can be positive and
yet still keep the debt/output ratio constant. It is only when the interest rate
exceeds the growth rate
that a trade surplus must be recorded (i.e., the trade deficit
must take a negative value) to maintain sustainability. If the
USA has a particularly favourable combination of economic dynamism
(i.e., high economic growth) and cheap external financing ( i.e.,
low interest costs on its external borrowings), it may not have
to run a trade surplus at any future date to secure sustainability.
The algebra set in the last few paragraphs is hardly complex,
but it generates powerful and important insights. In particular,
it highlights the key role of the relationship between the USA's
growth prospects and the financing costs of its external borrowing
in analysing the dynamics of its external debt. It also leads
easily to the discussion of simplified, but not unrealistic, illustrative
"scenarios" in which the USA moves to sustainability
within a plausible time-scale. Two such scenarios are set out
in the following section. They provide estimates of the positive
swing on the USA's trade balance required to restore sustainability;
they show the size of the resource shift into net exports that
the USA must make, eventually, to keep its people, companies and
government credit-worthy.
The analytical framework contained in the algebra is best understood
as a way of thinking about today's trends in order to make sensible
comments about the future. Of course, diagnosis is pointless unless
it makes the tasks of prognosis and prescription more manageable.
(However, the diagnosis here is rather crude. Some criticisms
raise deep questions about the validity of the argument. They
are discussed in a number of footnotes, particularly footnotes
(2), (3), (4) and (5) to this chapter. The reader needs to be
warned that the argument might be less compelling if the criticisms
were incorporated in the main text.)
Achieving sustainability
Chapter 2 showed that by late 2000 the USA's deficit on the
current account had reached 4.5% of its GDP and that, even after
the mini-recession of 2001, it remained at about 4% of GDP in
early 2002. (In 2002 as a whole it may again approximate 4.5%
of GDP.)
Official data on the size of the USA's net external liabilities
are a statistical nightmare, because so much depends on the valuation
procedure adopted.(5). Large inconsistencies between estimates
made at different times on the same valuation basis, and at the
same time on different valuations bases, muddle and complicate
analysis. But a fair compromise between the different estimates
is that the USA's net external liabilities amount to at least
20% of GDP. If
the USA's GDP were static
from now on, and the current
account deficit stayed at 4.5%
of GDP, the ratio of net external liabilities to GDP would be
24.5% of GDP a year from now, 29% two years from now, 33.5% of GDP three years from now and so on. Obviously, this
could not continue.
At what figure might the USA's debt-to-GDP ratio stabilize? Plainly,
stabilization is not going to happen in the next year or two.
So it will occur at somewhat above -- perhaps a great deal above
-- the 20% figure. For the sake of argument, consider two cases,
one ("the favourable case") with a debt-to-GDP ratio
of 40% and the other ("the unfavourable case") with
a debt-to-GDP ratio of 50%. What about the values of the two other
variables in the analysis of debt dynamics, the rate of interest
on international investments and the rate of US GDP growth, both
in nominal terms?
The specification of "the rate of interest" in international
investments is extremely difficult, because of the huge variety
of assets and liabilities involved. A short-cut is needed here
to take the discussion forward. The lowest interest rate
is also likely to be that on the safest asset, presumably government
securities. In the last few years the typical annual interest
rate on US government debt has been about 6%. The average
interest rate ought to be somewhat higher, because foreign-owned
assets include riskier, higher-return equities and real estate.
But assume -- for the purpose of the projection in the favourable
case -- that the interest rate on international investments is
only 6%. Of course, a higher interest rate has to be adopted for
the unfavourable case. American companies do indeed incur substantial
liabilities -- in the form of commercial paper and bonds -- to
foreign investors at the rate on US Treasuries plus a spread to
reflect their credit standing. The assumed annual interest rate
in the unfavourable case might reasonably be 7%.
A lively debate has proceeded in the last few years about the
potential for the so-called "New Paradigm" to boost
the USA's long-run rate of output growth. Some economists have
argued that the long-run growth rate has increased, as investment
in computers and information technology has raised the rate of
improvement in business efficiency. They have suggested that this
growth rate is now 3.5% a year or even 4% a year in real terms,
above the historical norm of 2.5% or 3% a year. Assume, further,
that long-run inflation expectations are about 2.5% a year, in
line with the yield differential between conventional Treasury
bonds and Treasury inflation-protected bonds (or "TIPS").
The implied long-run annual growth rate of nominal GDP is 6% or,
most optimistically, 6.5%. If the right figure is 6.5%, it is
above the interest rate of 6% assumed in the favourable case.
A relatively pessimistic, but not unrealistic, view is that the
trend growth rate of the USA's real output is still only 3% a
year, giving an annual growth rate of nominal GDP of 5.5%. This
number can be incorporated in the unfavourable case.
The sustainability formulae can now be put to work. In the favourable
case, with the debt-to-GDP ratio at 40%, an interest rate of 6%
and a growth rate of nominal GDP of 6.5% a year, the sustainable
current account deficit emerges as 2.6% of GDP and it is split
between a deficit on investment income of 2.4% of GDP and a trade
deficit of 0.2% of GDP. In the unfavourable case, with the debt-to-GDP
ratio of 50%, an interest rate of 7% and a growth rate of nominal
GDP of 5.5% a year, the sustainable current account deficit is
2.75% a year and it is split between a deficit on investment income
of 3.5% of GDP and a trade surplus of 0.75% of GDP.
How do these numbers compare with the situation today? At the
time of writing (May 2002) revised data are available only for
the third quarter of 2001. In that quarter the USA's exports of
goods and services were 9.5% of GDP and its imports 12.6% of GDP,
while the deficit on unilateral transfers was a further 0.5% of
GDP. (Figures for exports, imports and unilateral transfers are
on a balance-of-payments basis, but are divided by a figure for
GDP from the national accounts.) The trade deficit as such was
therefore 3.1% of GDP and a wider concept of the deficit, including
the unilateral transfers, was 3.6% of GDP. Meanwhile a further
deficit of $7.4bn, just above 0.3% of GDP, was recorded on net
flows of investment income.
The latest situation may now be compared with the two sustainable
outcomes identified at a future date. In the favourable case,
the trade deficit has to be whittled down from 3.6% of GDP to
only 0.2% of GDP; in the unfavourable case, a trade deficit of
3.6% of GDP has to be converted into a surplus of 0.75% of GDP.
In other words, the resource switch has to be about 3.5% of GDP
in the favourable case and over 4.5% of GDP in the unfavourable
case. An allowance also needs to be made for the cyclicality of
the starting-point in the third quarter of 2002, which saw falling
output at the trough of a mini-recession. Some rebound in imports,
and so in the trade deficit, has to be expected as the economy
returns to a more normal cyclical position. If so, a sensible
verdict is that the USA will need to switch between 4% and 5%
of its GDP into net exports over some future period.
More detailed trajectories of imports, exports, the net international
investment position and investment income flows can be derived,
and one such path to sustainability is set out in an Appendix
to this chapter. A standard feature of such trajectories is that
the widening in the deficit on investment income account is greater
than that on the current account as a whole. This is logical --
indeed, inevitable -- because the persistence of the current account
deficit at high levels for some years implies the incurral of more liabilities
and, hence, the need to pay more investment income to foreigners. It could be argued, however, that
the speed of the slide into deficit on investment income is implausibly
large, compared with the behaviour of this item in the USA's external
payments until now.(6) At any rate, by conforming to the sustainability
formulae outlined above, the USA can arrive towards the end of
the coming decade, or more probably in the 2010s or 2020s, at
a balance-of-payments pattern which could endure indefinitely.
It does not repay its external liabilities and it never returns
to current account balance, but its situation is stable in the
sense that its net external liabilities are neither rising nor
falling relative to national output.
How much strain will the shift into net exports impose on the
US economy?
The precise numbers in the above paragraphs should not be
pressed too hard, but they serve a useful purpose. They suggest
the broad order of magnitude of the shift of US output into net
exports that will be required to restore sustainability. The results
are not apocalyptic, particularly if the return to sustainability
takes place over a 20-year period. (This is the time-scale in
the detailed trajectory in the Appendix.) In particular, the required
transfer of the USA's national output into net exports is far
from drastic when compared with the upheavals which developing
countries undergo cycle after cycle because of price swings in
their commodity exports.
But -- if a 4% - 5% switch of GDP into net exports does prove
necessary -- it would be the largest such switch in US production
away from domestic consumption and investment since the Second
World War. In that sense the scale of the adjustment task would
be unprecedented. The nearest equivalent was in the late 1980s.
In the four-and-a-half years to the first quarter of 1992 the
USA achieved a favourable swing in net exports amounting to 3.5%
of GDP. If the prospective move of resources into net exports
were at the same pace as in the late 1980s, it would have to go
on longer; if it took place in the same period of time, it would
demand a greater wrench in the pattern of national production
(i.e., 1% of GDP a year, not 0.75%, would have to be switched).
The comparison with the late 1980s is valuable. The USA has made
a big resource shift into net exports in the past; it can and
will do so again in the future. But the events of the late 1980s
need to be recalled and emphasised. A nation which moves 0.75%
or 1% of its output into net exports every year must also -- because
of the national income accounting identities -- restrict the growth
of domestic demand (i.e., private and government consumption,
and investment) to a rate 0.75% or 1% a year less than the increase
in its output. With the level of the USA's output today perhaps
only slightly beneath the long-run trend, restraint over domestic
demand will be needed. If this sounds harsh, it may be salutary
to note what happened in the four-and-a-half years to the first
quarter 1992. Domestic demand grew in real terms at a compound
annual rate of under 1.75%. Indeed, from the second quarter of
1990 to the first quarter of 1992 domestic demand fell. Moreover,
as discussed in Chapter 2, the dollar was extremely weak on the
foreign exchanges from 1985 to 1988, and this weakness fed into
domestic inflationary pressures.
To repeat, the numbers set out here should not be understood as
an exact forecast of the USA's demand and output growth, and its
balance of payments, in coming decades. But the central conclusion
-- that the USA will have to secure a resource shift into net
exports of about 4% - 5% of GDP over a multi-year horizon -- is
robust. Further, the analytical framework helps to clarify thinking
about the USA's balance of payments and thereby to reject some
of the more extravagantly optimistic comments about American economic
prospects.
It is clear, for example, that -- unless the trade deficit narrows
in the next year or two -- the eventual adjustment task will be
more arduous. Suppose that the reduction in the trade deficit
is postponed two years so that it starts in 2005 instead of in
late 2002 or early 2003. Then the debt/GDP ratio will be up to
10% of GDP greater -- and that increases the debt/GDP ratio
in the calculation of the sustainable ratio of the current account
deficit to GDP. With an interest rate of 6%, the steady-state
deficit on investment income is 0.6% of GDP higher for every 10%
increase in the debt/GDP ratio; with an interest rate of 7%, it
is 0.7% of GDP higher; and so on. Ultimately, the required shift
of US output into net exports has to be larger to offset the extra
deficit on investment income. The later that the reduction in
the trade deficit begins, the larger must that reduction be in
order to achieve sustainability.
Some American
economists have claimed that the external deficit is good news, because it demonstrates the USA's
attractions as a
magnet for the world's savings.
A common theme is that the deficit is explained by the relative
rates of return on investments in the USA and the rest of the
world. The USA is said to have a higher rate of return on capital
than Europe and Japan, and it is therefore identified as an appropriate
destination for capital flows. Writing in t he May/June 1999 issue
of The International Economy, Professor Gary Hufbauer proposed
that the current
account deficit was best understood as "an investment surplus." The deficit was "a sign of strength,"
since capital was being attracted to the USA whose economy was
"the envy of the world." (7) If this claim were true,
an unwelcome
implication would flow readily
from the analytical framework. If the high rate of return on capital
implies an increased interest rate on international investments,
the larger
is the USA's future deficit on investment income for any given stock of foreign owned capital
and the
larger also must be the offsetting trade surplus.
A variant of the envy-of-the-world thesis is that the USA's leadership
in high-tech trade will enable it to launch an overwhelming export
drive in the next decade, as its technologically superior products
dominate world markets. The trouble with this thesis is twofold.
First, in 1999 and 2000 the USA incurred deficits on trade in
high-tech goods. It had a surplus on high-tech trade when royalty
payments and license fees are included to give a concept of high-tech
trade in goods and services, but it was quite small, running
at only $15bn in 2000. High-tech exports are not big enough to
outweigh adverse trends in the rest of the USA's trade. Secondly,
the behaviour of most items of high-tech trade has been similar
to that of traditional exports. A surplus of over $10bn on high-tech
trade was recorded in 1997, but this dwindled to almost nothing
in 1998 and moved into deficit in 1999 and 2000. There is no clear-cut
evidence that high-tech exports are growing more quickly than
high-tech imports.(8)
The conclusion has to be that the USA has to shift 4% - 5% of
GDP into net exports, probably over the next five to ten years,
to secure a sustainable payments position in which its net external
liabilities are stable at no more than half of its national output.
Moreover, it has to make this adjustment to a large extent by
achieving faster growth in its traditional exports (relative to
its imports). The USA's high-tech leadership is not so decisive
that a big export boom is already in prospect and can be pushed
through without effort. A resource shift of 4% - 5% of GDP will
require restraint over domestic demand, a dollar devaluation or
some combination of the two. It may put more strain on the American
economy than any other comparable resource shift in the post-war
period.
Notes
(1) The point was made by the author in an October 1989 Lombard
Street Research occasional paper. ('Do economists know how to
recognise a "balance-of-payments problem"?', Occasional
Research Paper no. 2 [London: Lombard Street Research, 1989])
The paper is available from the author at tim.congdon@lombardstreetresearch.com.
(2) This assumption is common to most forecasts of the USA's external
payments. However, in the real world it is not generally true.
The change in net external liabilities may not be equal to the
current account deficit, because of revaluations and devaluations
of such assets as equities, real estate and direct investment.
A particularly serious difficulty arises when, because much of
the value of an asset is "goodwill," the asset's market
value is well above its book cost. Large divergences between market
value and book cost create fundamental problems in the analysis
of long-run international payments trends. See the annual surveys
of 'The international investment position of the United States'
in the Department of Commerce's publication, Survey of Current
Business.
(3) A key finding of the Federal Reserve's annual surveys of the
USA's international payments is that the rate of return on the
USA's direct investments overseas is much higher than the rate
of return on the rest of the world's direct investments in the
USA. (The Federal Reserve's survey of 1999 noted that "the
overall rate of return on US direct investment abroad increased
only slightly in 1999 -- to 9.7%; this figure is considerably
below the 11.9% earned in 1997." By contrast, the rate of
return on foreign direct investment in the USA was 5.7% in 1999,
up from 5.3% in 1998 but lower than 6.5% in 1997. The Federal
Reserve commented that "the reasons for the differential
in the rates of return are not well-understood." See p. 311
of Federal Reserve Bulletin (Washington: Federal Reserve,
1999). The return differential has a very important consequence,
that the economic value (and -- in the normal course of events
-- the market value) of any given amount of US investment abroad
is higher than the economic and market value of the same amount
of foreign investment in the USA. It follows that -- if the USA
receives foreign investment above its own investment abroad (i.e.,
runs a current account deficit) -- the increase in the value of
the USA's stock of investments abroad may be so far ahead of the
increase in the value of the foreign investment in the USA as
to match, or even to exceed, the alleged "current account
deficit". This point raises fundamental questions about the
validity of the analytical exercise in the present study. See
also the previous footnote.
(4) What about the credit-worthiness of the US government? The
claim that the private sector always knows what it is doing --
and therefore that a country with a budget surplus cannot have
a balance-of-payments problem -- is yet another fundamental criticism
of the analytical framework in the present study. (See Tim Congdon
'A new approach to the balance of payments', Lloyds Bank Review
[London: Lloyds Bank, 1982], pp. 1 - 14. The paper developed some
ideas originally proposed by Professor Max Corden in some lectures
at the University of Chicago in 1976.) While the USA incurred
heavy current account deficits in the late 1990s, its government
simultaneously ran large budget surpluses.
(5) See Harlan King 'The international investment position of
the United States at Yearend 2000', pp. 7 - 15, in the July 2001
issue of Survey of Current Business for the Department
of Commerce's latest assessment. "With direct investment
valued at the current cost of tangible assets, the [USA's] negative
net position increased to $1,842.7bn at yearend 2000 from $1,099.8bn
at yearend 1999; with direct investment valued at the stock market
value of owners' equity, it increased to $2,187.4m. at yearend
2000 from $1,525.3bn at yearend 1999." Obviously, the extent
of the USA's "net external debt" depends on how the
assets and liabilities are measured.
(6) The widening in the USA's investment income deficit in recent
years has been less than might have been expected from the simple
application of a realistic rate-of-return number to the accumulated
value of its current account deficits. See footnote (3) above
for further discussion.
(7) Gary Hufbauer, contribution to a symposium on the USA's external
deficit, May/June 1999 issue of The International Economy
(Washington).
(8) The point was developed at more length in 'Totally unsustainable,
part V: high-tech leadership will not restore sustainability
to the USA's external payments', pp. 3 - 12, in October/November
2000 issue of the Lombard Street Research Monthly Economic
Review (London: Lombard Street Research).
|
Appendix to Chapter 3   The accompanying charts show the dynamics
of net exports and net external liabilities, relative to GDP,
given the assumptions.    |
4.
Is a big fall in the dollar needed?
Some theory: "expenditure-reduction" versus "expenditure-switching"
to correct external deficits
The last chapter explained why the USA has to shift between 4%
and 5% of its GDP into net exports at the some period in the foreseeable
future, probably in the next five to ten years. The next question
is "how?". Following a distinction made by Johnson,
economists propose two main types of policy response to a large
external deficit.(1) The underlying thought is that the essence
of the deficit problem is that imports are too large relative
to exports. (This may sound banal, but it is not. Payments deficits
can also be attributed to unsound public finances and irresponsible
monetary policy.)
The first type of policy -- known as expenditure-reducing -- takes it for granted that imports are a reasonably
stable proportion of expenditure. If so, policy can reduce imports
only by cutting domestic expenditure. A possible by-product of
expenditure reducing policies is that exports may grow more strongly
than would otherwise have been the case, because the contraction
in demand lowers output and so frees up resources for exports.
Nevertheless, as a broad generalisation, the focus of expenditure-reducing
policies is on attacking the import bill. Expenditure-reducing
policies include tax
increases to lower disposable
income, retrenchment
in public expenditure and
increases
in interest rates. In principle,
expenditure-reducing policies could eliminate an external deficit
without a change in the exchange rate.
The second type of policy response is "expenditure-switching." Here policy aims to harness the price
mechanism, first, to lower the proportion of their expenditure
that people in the deficit country spend on imports and, secondly,
to encourage foreigners to devote a higher proportion of their
expenditure to buying the goods and services that it supplies.
The classic type of expenditure-switching policy is a devaluation, a sudden,
once-for-all and policy-determined change in the exchange rate. But a milder version of the same basic
strategy is a gradual
decline in the exchange rate
unimpeded by foreign exchange intervention and blessed by policy-makers.
Tariffs are also sometimes included in the
armoury of expenditure-switching weapons, although nowadays their
use is restricted by international agreements.
How will the USA tackle its external deficit? Will the emphasis
be on expenditure-reduction rather than expenditure-switching,
on demand restriction rather than devaluation, or will policy-makers
be indifferent to the question and take no active policy steps
whatsoever?
Policy options
The option of total indifference
-- or of "benign
neglect" -- should
not be dismissed out of hand. There is at least an argument that
policy-making politicians and bureaucrats cannot know the deep-seated
determinants of payments deficits and surpluses between nations,
just as they cannot know the ultimate causes of corporate and
personal financial deficits and surpluses within nations. However,
governments do have to be concerned about sharp changes in the international demand
for their debt and in the
repercussions
for their banking systems of abrupt swings in international sentiment towards their currencies.
The Asian crisis of 1997 showed that a sudden loss of confidence
may interrupt the banking flows -- notably loans from the international
banks -- which have previously financed a large current account
deficit. Given the scale of the USA's external deficit, it would
be foolhardy for American policy-makers to ignore it altogether.
A standard textbook argument is that the expenditure-switching
approach is facilitated by a high responsiveness of international
trade flows to changes in relative prices. This responsiveness
is measured -- technically -- by the price elasticities of demand
for imports and exports, or by the elasticity of substitution
between traded and non-traded goods.(2) Broadly speaking, the
implied policy conclusion is that the higher are the price elasticities,
the more attractive are expenditure-switching policies compared
with expenditure-reducing policies. Quite elaborate statistical
models can be developed, to show the relationship between the
size of the dollar devaluation needed and the extent of the resource
shift into net exports. Three such models are discussed here for
illustration, although the literature on the subject is vast and
many other academic papers could be cited.
The studies in which the three models appeared have plainly been
motivated by the USA's slide into deficit since the mid-1990s.
The first is by Obstfeld and Rogoff, and was presented to the
Jackson Hole conference of central bankers in August 2000. (3)
(When giving the paper, the dollar was worth 1.11 euros and 108
yen.) They pointed out that the estimate of the required dollar
devaluation could not be cast in stone. It depended on circumstances,
particularly the assumed length of the period of adjustment to
the USA's external accounts and the size of the traded goods sector
(i.e., the factories, farms and mines more or less permanently
competing in foreign markets or with imports in the US market)
relative to the non-traded traded goods sector. Assuming that
the traded goods sector was a quarter of the USA's GDP, and that
the adjustment occurred gradually (i.e., over two or three years,
with the elasticity of substitution between traded and non-traded
goods being held at one), "the real exchange rate would fall
by 12%." Different assumptions would give different numbers.
If a sudden reversal in trade flows became imperative, "we
would need to see a dollar depreciation on the order of 45% --
pretty much exactly the short-run number one gets from old-fashioned
large-scale black box macro models."
The second study is by Mann and was published by the Institute
for International Economics in September 1999. (4) (When the study
was published, the dollar was worth 0.95 euros and 107 yen.) She
recognised the difficulty of defining the notion of "sustainability"
in a nation's external payments and reviewed experience from a
large number of countries in order to identify "sustainability
benchmarks." After examining data from 10 industrial countries
in the 1980s and 1990s, she found that the average current-account
deficit-to-GDP ratio was 4.2%, "when the current account
[deficit] started to narrow". Even after the narrowing began,
the net ratio of foreign-owned claims to the deficit nations'
GDPs "continued to climb" and so she questioned whether
this variable had been crucial in triggering the "the change
in the current account trajectory". She then explored three
future paths for the USA's external payments -- a base case, a
devaluation case and a "structural change" case. In
the first two paths the income elasticities of demand for the
USA's exports and imports were taken from the most commonly-cited
empirical studies; in the third these elasticities were overridden
and it was assumed that the income elasticity of demand for the
USA's exports and imports were closer together than had been true
in recent decades.
The base case relied on assumptions about growth in the USA and
the rest of the world, and about the rate of return on international
investments, which seemed plausible given patterns in the last
few years, but did not include a change in the exchange rate.
(The assumed rate was "about 120 on the IMF's nominal effective
exchange rate index", with 1995 = 100.) The outcome was external
deficits which -- after only a few years -- became plainly unsustainable.
Even with "high performance" in the American economy
(i.e., a good supply-side record), the current-account-deficit-to-GDP
ratio moved out to 5.0% in 2005 and 7.0% in 2010, well ahead of
Mann's 4.2% sustainability benchmark. The second case shared most
of the same assumptions as the base case, except that the exchange
rate was devalued by 25% immediately (i.e., in late 1999) and
kept at the same lower level throughout the period of the projection.
The effect was to slash the current-account-deficit-to-GDP ratio
to "less than 2% in the next two or three years," which
would restore sustainability.
Unhappily, "after about five years the trade account and
the current account deficit" widened "again", because
the import elasticity of the demand for the USA's exports was
taken to be lower than that for its imports. With the USA's output
growth ahead of that in other countries, this "income asymmetry"
condemned the current account to slither into the red. The only
escape came in the third case, which rejected statisticians' estimates
of the income elasticities. If the rest of the world could become
more receptive to the USA's exports, and particularly to the service
exports in which the USA appears to excel, there would be the
necessary "structural change" in the export income elasticity.
The USA's trade would again be "on a sustainable trajectory,"
with the current account deficit staying at around 3% of GDP (i.e.,
lower than the unacceptable 4.2% figure).
A third recent analysis of the USA's external payments is by Papaioannou
and Yi, and appeared in the Federal Reserve Bank of New York's
Current Issues in Economics and Finance of February 2001.
(5) (When the paper was published, the dollar was worth 1.09 euros
and 116 yen.) One novelty of their analysis was the notion of
a "potential output trade balance." This was the level
of a nation's trade balance associated with its trend output.
("Trend output" is that at which unemployment is at
its natural rate and inflation is stable.) The purpose of deriving
a "potential output trade balance" was to separate cyclical
from non-cyclical influences on changes in the trade balance,
and to quantify their relative sizes. More specifically, the authors
wanted to answer the question, "how far was the deterioration
in the USA's trade balance between 1996 and 1999 due to cyclical
forces?" Like Mann, they had to insert values of the import
and exports income elasticities into their model (i.e., they had
to accept the famous "income asymmetry") before they
could make estimates.
In their central case Papaioannou and Yi calculated that, "cyclical
forces in the USA -- in particular, the import surge produced
by the economic boom -- accounted for $45bn, or almost one-third,
of the $142bn increase in the deficit between 1996 and 1999".
This assessment was robust; it had to be amended, but not fundamentally
changed, if different assumptions were made about the income elasticities.
In other words, the dominant reason for the widening of the USA's
trade gap in the late 1990s was not the cyclical vibrancy of American
domestic demand in a relatively weak world economy, but non-cyclical
forces "such as relatively low interest rates, a strong dollar,
and high productivity growth."
The three studies considered here had different approaches to
the subject, but one
common message emerged.
It was that sustainability -- however defined -- could not be
easily restored by policy actions which ignored the exchange rate. The Papaioannou and Yi paper implied
this result in a simple and compelling way. If the boom of the
late 1990s was not the main cause of the widening of the trade
gap, something else had to be the culprit. Their paper was cautious
in its even-handed references to three "non-cyclical forces,"
but in reality surely only one such force -- the strong dollar
-- had to take much of the blame. (Central bank economists may
be well-trained and objective, but -- if they work for the Federal
Reserve Bank of New York -- they have to be careful what they
say about the dollar exchange rate!) The analyses by Obstfeld
and Rogoff, and by Mann, were more frank in their comments on
the exchange rate. While acknowledging that the scale of the downward
exchange rate move could be moderated the longer the adjustment
period, Obstfeld and Rogoff mentioned dollar depreciations in
the 12% - 45% range. Mann conceded the dependence of her results
on the divergence between the income elasticities of demand for
the USA's exports and imports, but her base case without devaluation
was obviously unsustainable and even a 25% devaluation was insufficient
in the long run.
When three separate research exercises arrive at the same broad
view, that view becomes difficult to challenge. The conclusion
has to be that expenditure-reducing policies cannot, by themselves,
take the USA back to external sustainability. The three studies
were published at different times -- in September 1999, in August
2000 and February 2001 -- but events soon confirmed their message.
In 2001 the USA suffered a sharp slowdown in the growth of domestic
demand, with numerous media references to "the recession"
by late in the year. The slowdown reduced the current account
deficit somewhat, but it was not enough to bring the deficit down
to the levels generally regarded as sustainable. With the bounce-back
in the economy in early 2002, the trade and current account deficits
again started to widen. No doubt expenditure-reducing measures
could work if they were on the necessary scale, but this might
involve a big recession and serious damage to the world economy
as well as to the USA. The verdict has to be that expenditure-switching
action will have to occur sooner or later. More concisely, the dollar will have
to fall in value against other major currencies.
Heavy fall in dollar is inescapable
Chapter 3 showed that, to restore sustainability to its external
accounts, the USA has to shift 4% - 5% of its GDP into net exports.
By reviewing key contributions to the literature, this chapter
has demonstrated that -- realistically -- the shift can only happen
if the dollar falls heavily against the other major currencies.
The major currencies in the context are the euro and the yen.
As in the previous chapter, it is helpful to recall the 1980s.
After the sharp increase in the USA's trade and current deficits
in the early 1980s (which occurred in conjunction with substantial
dollar appreciation), the dollar slumped between 1985 and 1988.
Economists were baffled by the strength of the dollar in 1983
and 1984, but eventually they were right that a major devaluation
was needed to put the USA's external payments back onto a viable
path. The same sort of comment, backed up by the same kind of
analyses, is being made today. The economists will again be right,
with the big uncertainties being the length of time over which
the adjustment proceeds and the scale of the dollar devaluation
needed to correct the disequilibrium. It may be that the adjustment
lasts over a decade and that the fall in the dollar is only 10%
or 20% from its level in early 2002. But a more plausible assessment is that
the adjustment will occur in under a decade and require the dollar
to fall by between a quarter and a half (against competitor currencies, on a trade-weighted
basis) from its peaks.(6)
Notes
(1) Harry Johnson 'Towards a general theory of the balance
of payments', pp. 46 - 63, in Jacob Frenkel and Harry Johnson
(eds.) The Monetary Approach to the Balance of Payments
(London: George Allen & Unwin, 1976). (The paper originally
appeared in 1958.) The distinction between expenditure-reducing
and expenditure-switching policies appears on p. 56 of the Frenkel
and Johnson volume.
(2) The price elasticity of the demand for a product is defined
by the ratio of the proportional change in the quantity demanded
to the proportional change in the price. If quantity demanded
quadruples, when the price halves, the elasticity of demand is
two. The income elasticity of the demand for a product is the
ratio of the proportional change in quantity demanded to the proportional
change in incomes.
(3) Maurice Obstfeld and Kenneth Rogoff 'Perspectives on OECD
economic integration: implications for US current account adjustment',
pp. 169 - 208, in Global Economic Integration: Opportunities
and Challenges (Kansas: Federal Reserve Bank of Kansas, 2000).
(4) Catherine Mann Is the U.S. Trade Deficit Sustainable?
(Washington: Institute for International Economics, 1999). The
following account of Mann's position borrows heavily from chapter
10 of the study and, in particular, from pp. 156 - 71.
(5) Stefan Papaioannou and Kei-Mu Yi 'The effects of a booming
economy on the US trade deficit', pp. 1 - 6, February 2001 issue
of Current Issues in Economics and Finance (New York: Federal
Reserve Bank of New York).
(6) These conclusions are rather general and cannot claim to be
scientifically exact. It is worth noting the forecasting failure
of an exercise carried out at the Washington-based Institute for
International Economics in 1989. The institute published a study
on American Trade Adjustment: the Global Impact by Cline,
which warned about the medium- and long-run consequences of the
deficit which the USA was running at the time. A sense of perspective
is given by noting that in 1988 the current account deficit was
$126bn, about 2% of GDP, and that Cline judged this as risky in
its eventual implications for the USA's external solvency. He
took a ratio of external debt to gross national product of 14%
as a higher limit, and envisaged a large dollar devaluation to
limit the external deficit and foreign debt. The dollar was in
fact a weak currency until 1995, but it is clear that Cline was
too alarmed by ratios of deficits and debt to GNP/GDP which would
not now be regarded as a matter for comment. Economists must accept,
in all humility, that they have trouble in spotting and defining
a "balance-of-payments problem."
5.
Can the coming slide
in the dollar be reconciled
with its status as the world's dominant reserve currency?
Why do nations hold foreign exchange reserves?
Any discussion of the future of the dollar has to be set within
the broader context of financial geopolitics. An argument can be made that -- in a world of floating exchange rates -- governments do not need to hold reserves of foreign
exchange and gold at all.
The underlying thought is that changes in exchange rates will
ensure that payments between nations balance, without the need
for official purchases or sales of foreign exchange. As such purchases
and sales are therefore unnecessary, so also is a government-owned
stock of gold and foreign currency.(1) The world today has a hybrid currency
system, with the currencies
of big countries and the European currency area floating against
each other, while the currencies of small countries are sometimes
fixed against a big-country currency and sometimes floating. There
is good evidence that the small countries' reserves tend to be
mostly in the currency of the big country to which their own currency
is linked, or with which they have close trading and financial
ties.(2) Nevertheless, virtually all governments -- including
the governments of big countries with floating exchange rates
-- hold reserves. Clearly, the nature of the international currency
system cannot be the only determinant of their demand for reserves.
Insight is gained by recalling the historical development of international
financial arrangements
and the geographical distribution of reserve holdings today. The
salient feature of the historical record is that -- until the
late 20th century -- governments' international reserves were
dominated by gold. In the 19th century this was a necessary
and inevitable by-product of the gold standard, which was managed
by the principal trading nation, Britain. In the early 20th century
British decline implied the absence of a global hegemon and considerable
geopolitical instability. This instability was evidenced not only
in two world wars, but also by severe restrictions on trade and
financial flows between nations in the inter-war period. Because
of the prevailing uncertainties, the governments and peoples of
different nations were unwilling to build up large paper claims
on each other. Quite simply, they were afraid that debtor nations
-- or even debtors in creditor nations -- would not pay up. Gold had the key virtue
that it had intrinsic value;
its credibility
in payment did not depend on
the promise of a particular nation or government.
In extreme circumstances, when nations were at war or faced trade
embargoes, gold was a reliable international money. Unlike paper
money, it could be expected to serve as a cross-border store of
value and medium of exchange at all times.
In other words, governments
held monetary reserves not
merely to protect a particular exchange rate, but because of geopolitical
instability. In times of
national emergency, and in particular when war was threatened
or had broken out, these reserves could be mobilized to buy weapons
and essential imports, such as food and oil. In the polycentric
world economy of the early 20th century -- when several powers
were striving for leadership -- gold was the most basic reserve asset. At the start of the 21st century,
when the leading industrial nations are at peace and a book has
been written on The End of History, to recall this element
in the demand for reserves may seem anachronistic, even eccentric.
But its continued relevance is demonstrated by focusing on an
obtrusive fact about the current geographical distribution of
reserves.
The greater part of world output is produced in North America
and Europe, but countries in these two continents do not hold
most of the world's foreign exchange reserves. Instead Asian countries
are by far the largest holders. The discrepancy between their
share of world output and their share of world foreign exchange
reserves is striking. A possible explanation is the recent Asian
crisis, which reminded nations such as South Korea and Thailand
that their governments ought to have foreign exchange reserves
in order to facilitate the servicing of their private sectors'
international debts. But this cannot be the whole story. Asian
countries had a disproportionately high share of total foreign
exchange reserves well before the beginning of the crisis with
Thailand's devaluation of the baht in July 1997. Moreover, as
Table 5.1 shows, the most sizeable foreign exchange reserves are
held in Japan, China and Taiwan, two of which (Japan and Taiwan)
are international creditors. Singapore also has unusually ample
foreign exchange reserves for a small country, particularly in
view of its massive net foreign assets apart from its reserves.
Why, then, does Asia have such
a large demand for foreign exchange reserves? A case can be made
that a vital underlying factor in these countries' demand for
foreign exchange reserves is continuing diplomatic instability in East Asia
and, more specifically, the unpredictability of China. China is
not only the world's most populous nation, but also potentially
a leading economic power,
yet its policies remain hard to read. By holding large quantities
of dollars deposits and US Treasury bonds, other Asian governments
may believe they have diplomatic clout in Washington. In the extreme,
they may believe these holdings give them the means to apply pressure
on US policy.
The coming slide in the dollar: how will it affect the demand
for the dollar as a reserve asset?
The message of the last section may be summarized by saying
that nations' need to hold foreign exchange reserves and their
demand for particular reserve assets are influenced by both economic and non-economic
considerations. Reserves
are held for economic reasons -- to give governments some power
over exchange rates (particularly if the exchange rate is fixed),
to facilitate the servicing of external official debt and to provide
support to the banking system in the servicing of its external
debt. But they are also held for non-economic reasons, particularly
to reinforce governments' diplomatic and military capability in
an uncertain geopolitical environment.
How much would the international demand for the dollar as an international
reserve asset be undermined by a large and protracted fall in
its value? The answer depends partly on the relative importance
of the economic and non-economic considerations in the demand
to hold it. A fair comment is that the non-economic demand to
hold the dollar -- the demand based on geopolitical imperatives
-- may be little affected by a fall in its value. The diplomatic
and military motives for holding dollars may be insensitive to
exchange rate fluctuations. (But that may not be entirely comforting
for the USA. By bringing the role of non-economic factors in the
Asian demand for dollars more to the fore, the USA's perhaps unwilling
involvement in a major theatre of international tension is clearly
anticipated.)
On the other hand, the economic demand to hold the dollar in foreign
exchange reserves seems certain to be undermined by a decline
in its value. This economic demand for reserves seems to be the
relevant one for most European and Latin American nations. A dress
rehearsal for the possible future foreign exchange dramas was
provided in the 1960s and 1970s, when the appreciating deutschemark
and yen gained ground relative to the two traditional key currencies,
the dollar and the pound, as reserve assets. The fall in the international
value of both the dollar and the pound must have affected their
appeal to official holders of foreign exchange. If the dollar
were again to lose over a quarter of its value (as suggested at
the end of Chapter 4), these holders could not be indifferent.
They would want
to have another asset of more stable and predictable value.
The euro has been widely canvassed as an alternative to the dollar.
The combined GDP (about $7,000bn) of the eurozone's members is
smaller than the USA's GDP (over $10,000bn) at current prices
and exchange rates (May 2002), but the difference between them
is a gap, not a chasm. At present the euro's weight in the world's
foreign exchange reserves is much less than implied by the eurozone's
and the USA's relative economic size. If the dollar were to plunge
heavily in value against the euro, an adjustment to a more balanced
pattern of reserve holding would be logical. (Similar remarks
might also be ventured about the yen, but Japan's economic difficulties
over the last few years appear to disqualify it from an expanded
reserve currency role for the time being.)
However, the euro has two fundamental weaknesses as a reserve
currency. The first is that it is a most unusual construct, the
currency of an area with 12 national governments. No other example
can be cited of significant sovereign nations sharing a single
legal-tender currency. The debate about the relationship between
monetary union and political union is far from settled, and a
case could be made that the 12 "governments" are members
of a de facto political union. But they continue to think of themselves
as national governments, with responsibilities for banking supervision,
deposit protection, debt management and so on. The extent of these
responsibilities, and in particular the demarcation of their roles
relative to the European Central Bank's, are questions of great
institutional complexity and political difficulty. But these questions
are also important
to governments and central banks in Asia, Latin America and the
rest of the world, when they decide the currency denomination
of their reserves. A fair
comment is that -- unless a fully-fledged political union emerges
in Europe -- the euro will be handicapped in its competition with
the dollar. The dollar would have to be extremely weak over a
long period for the euro to overcome the unattractiveness inherent
in the circumstances of its birth.
The euro's second weakness is more deep-seated. The nations of
the Eurozone face an unprecedented economic and social challenge
in the early 21st century from demographic trends. Not only will
the number of old people be rising relative to the working-age
population, but the working-age population will be falling in
most of the eurozone's members. From the late 2010s the fall will
exceed 1% a year in some countries, severely restricting economic
growth. The contrast with the USA, where immigration seems likely
to cause labour force expansion more or less indefinitely, is
marked. Their different demographic patterns imply that the USA
will increase in economic importance compared with the Eurozone
in the opening decades of the 21st century.(3)
Will gold become more attractive as a reserve asset?
A reasonable case can therefore be made, on institutional
and strategic grounds, that the euro will not rival the dollar
as a reserve asset in coming decades. Yet this study has argued
that dollar has to fall heavily against other leading currencies,
with its exchange rate down by perhaps between a quarter and a
half, to facilitate a resource shift of 4% - 5% of GDP into the
USA's balance of payments. On the one hand, the dollar seems irreplaceable;
on the other hand, it looks thoroughly unattractive. How is the conundrum to be resolved?
And is this where gold can make a comeback?
Much will depend on the return on dollar assets. It is worth emphasising that the dollar may be losing
value relative to, say,
the yen, but
dollar bonds could still give a better overall return than their yen-denominated alternatives
because they have a higher yield. If the yield on dollar assets
rises to persuade international money managers to keep them, dollar
assets will remain worthwhile investments even in a weak-dollar
environment. Gold has the serious disadvantage that, by itself,
it offers no yield. It is true that an income return can be secured
nowadays by gold loans in the derivatives market, but the return
is modest compared with that available in dollar bonds. Gold could
overcome this drawback only if the real return on dollar paper
assets were to be hit by rapid inflation. If inflation were to exceed the interest
rates on dollar deposits and bonds
(as it did in the 1970s), the negative real return on dollar assets would cause wealth-holders around the
world -- including governments and central banks -- to reconsider
the investment
merits of gold. If the gold price were rising in line with or faster than the general
price level, the return on gold would be above that on dollar
paper assets. Gold
would again be a more attractive reserve asset.
The key issue here is whether dollar depreciation is associated
with high American inflation. As the double-digit annual inflation
rates of the 1970s came as a shock to savers, it took them time
to catch up with the different investment context. Interest rates
lagged behind inflation and real interest rates became negative,
creating the ideal conditions for rising prices of gold and other
so-called "hard assets" (oil, real estate, commodities).
No one can say for certain whether the dollar's coming fall will
be accompanied, once again, by an upturn in inflation. Crucial
will be central banks' -- and particularly the Federal Reserve's
-- attitude towards the causes of inflation. The intellectual underpinnings
of Volcker' assault on inflation
in the early 1980s, that inflation is caused by excessive growth
of the quantity of money, is now profoundly unfashionable in the USA and other English speaking countries.
Perhaps the greatest imponderable of all is whether the global
political and economic stability of the 1990s will prove to be
transient or more lasting. Tension between Western values and Islamic fundamentalism has been a background
theme in much geo-political discussion for many years, but the
events of 11th September 2001 made the subject more urgent and
problematic. The Middle East has traditionally been a significant
importer and holder of gold, and the demand for gold in jewellery
remains stronger in Saudi Arabia and the Gulf states than in other
societies with a similar level of income per head. If these nations
were to weaken their military and economic alliances with the
USA, there could be a
reduction in the official reserve demand for the dollar as well
as an increased private sector interest in gold as a safe haven asset.
At any rate, it must be true that a sudden collapse in the dollar's external
value is likely to feed back to the USA's domestic inflation rate. (4) As Preeg has warned in The
Trade Deficit, the Dollar and the US National Interest, the
most serious threat from the payments deficits is "the familiar
syndrome of financial markets tending to overshoot equilibrium
levels when reacting to perceived imbalances," with the result
being "an
excessively large decline in the dollar". (5) Although policy-makers around the
world accept that exchange rates are set by market forces and
are understandably reluctant to meddle with currency fluctuations,
they need to be alert to the dangers of continued large American payments
deficits. They cannot avoid
the message that such deficits will have to be countered -- sooner
or later -- by a fall in the dollar; they also cannot deny that,
if the dollar's fall is too large and compressed into too short
a time-scale, it will raise American inflation and shatter the confidence
in paper assets built up in the 1980s and 1990s.
Notes
(1) A large academic literature on "the
demand for foreign exchange reserves" exists, but much of
it assumes a peaceful world in which the demand is essentially
economic. (It is a function of the level of imports, of terms-of-
trade shocks and such like.) The literature appears to overlook
that in the real world governments must sometimes fight wars and
that to pay for sophisticated weapons they must hold large amounts
of the currency of the world's leading military power.
(2) Michael Dooley and others 'The currency composition of foreign
exchange reserves', pp. 385 - 434, IMF Staff Papers (Washington:
International Monetary Fund, 1989).
(3) The demographic constraint on Europe's future growth was discussed
in research papers in the November 2001 and January 2002 issues
of the Lombard Street Research Monthly Economic Review.
(4) An article by Robert Rich and Donald Rissmiller in the July
2000 issue of the Federal Reserve Bank of New York's Current
Issues in Economics and Finance argued that the low inflation
of the late 1990s was not due to a fundamental improvement in
the USA's supply-side performance, but "to a large and persistent
decline in import prices." The strong dollar must have been
vital to this decline, although the authors in fact excluded exchange
rate movements from their model.
(5) Ernest Preeg The Trade Deficit, the Dollar and the US National
Interest (Indianapolis: Hudson Institute, 2000), p. 89.
by Tim Congdon
September, 2002
Reprinted by USAGOLD
by kind permission of the author, Tim Congdon of Lombard Street Research (www.lombardstreetresearch.com),
and the World Gold
Council (www.gold.org). Further use without consent is prohibited.
Copyright © 2002. All Rights Reserved.
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