David Dodge on U.S. Economics

Post ImageI have read many times about the huge current account deficit in the United States, but usually from American media like The Economist, or maybe something from Europe. Never from Canada! It seems the Canadian government generally likes to keep quiet about our neighbour’s spending habits, maybe for fear of more beef or softwood lumber-like troubles. Needless to say, I was quite surprised to read today that Bank of Canada governor David Dodge had something to say on the matter:

In the text of a speech to be given at a Montreal conference, the central bank chief warned of “large, global economic imbalances that have become the subject of increasing concern” to policy-makers.

“I am referring, of course, to the persistent and growing current account deficit in the United States that is mirrored by large current account surpluses elsewhere, especially in Asia.”

Basically what has happened is that the United States has decreased their saving while most of the rest of the world has increased saving. Thus, the U.S. has become reliant on foreign borrowing, creating the large deficits that Dodge and other economists talk about (the United States actually has three deficits, international trade, current account, and federal budget). At the same time, China and other Asian nations have used their large and growing export income to soak up the American debt.

I think it’s really interesting to watch, even if the situation unfolds slowly. For some reason, it seems significant to me that Canada finally had something to say on the matter too, though I can’t put my finger on exactly why.

“At some point, they will have to be resolved. Why? For one thing, a country’s external indebtedness cannot keep growing indefinitely as a share of its GDP. Eventually, investors will begin to balk at increasing their exposure to that country, even if it is a reserve-currency country, such as the United States.

“For another thing, the buildup of foreign exchange reserves by Asian countries will, eventually, feed into domestic monetary expansion and lead to higher inflation. These imbalances will ultimately be resolved, either in an orderly, or in an abrupt, disorderly way.”

Perhaps Dodge is worried that things are heading down the path to a disorderly resolution, which would probably be bad for Canada.

Read: CBC News

2 thoughts on “David Dodge on U.S. Economics

  1. Actually, now that you mentioned it, I read an article on the New York Times a week ago about this exact problem. Asian countries like China are using their export earnings to buy American debt at low interest, that’s what they deficit doesn’t seem to affect the Americans that much. It’s kind of ironic for those countries to be the debt collector this time!

  2. It’s kinda funny! The Americans have gone from being the world’s largest lender to the world’s largest debtor, all thanks to the Asian countries.

    On the other hand, Greenspan is a very smart man, maybe he knows what he’s doing after all.

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