Chapter

The U.S. Saving Deficiency, Current-Account Deficits, and Deindustrialization

Ronald I. McKinnon

in The Unloved Dollar Standard

Published in print December 2012 | ISBN: 9780199937004
Published online January 2013 | e-ISBN: 9780199980703 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199937004.003.0006
The U.S. Saving Deficiency, Current-Account Deficits, and Deindustrialization

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Because of the dollar's unique status as “international money,” the United States has borrowed seemingly without restraint from the rest of the world—mainly Germany and Japan in the 1980s, and then from a variety of emerging markets led by China in the new millennium. This induced an endogenous fall in domestic saving in the United States—both private and governmental—which is now compounded by the Fed's zero-interest-rate policy. The U.S. federal government finds it just too easy to avoid raising taxes or cutting expenditures because it can sell Treasury bonds to foreign central banks at ultralow interest rates. Both sides are trapped. Foreign central banks accumulate dollar reserves at a derisory interest rate to prevent their currencies from appreciating precipitately in the face of hot money inflows. America's unhealthy dependence on foreign borrowing aggravates its ongoing deindustrialization. High-saving countries in East Asia are not only the natural creditors of the United States but are also highly industrialized. Thus they run trade surpluses in manufactures as the real counterpart of the transfer of finance to the United States, which accentuates the decline in U.S. manufacturing.

Keywords: international money; soft borrowing constraint; endogenous saving; financial transfer; manufacturing trade deficit; deindustrialization

Chapter.  3882 words.  Illustrated.

Subjects: Financial Markets

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