Decrease of FOMC Policy Rate, “Monetary Policy In a Good Place,” Mediocre Cyclical United States Economic Growth with GDP Three Trillion Dollars Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Cyclically Stagnating Real Private Fixed Investment, United States Terms of International Trade, IMF View of World Economy and Finance, United States Current Account and Net International Investment Position, Decline of United States Homeownership, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk: Part II

Decrease of FOMC Policy Rate, “Monetary Policy In a Good Place,” Mediocre Cyclical United States Economic Growth with GDP Three Trillion Dollars Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Cyclically Stagnating Real Private Fixed Investment, United States Terms of International Trade, IMF View of World Economy and Finance, United States Current Account and Net International Investment Position, Decline of United States Homeownership, World Cyclical Slow Growth, Government Intervention in Globalization, and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019.

I Mediocre Cyclical United States Economic Growth with GDP Three Trillion Dollars Below Trend in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide

IA Mediocre Cyclical United States Economic Growth

IA1 Stagnating Real Private Fixed Investment

IID United States Terms of International Trade

II IMF View of World Economy and Finance

II E United States Current Account and Net International Investment Position

II F Decline of United States Homeownership

III World Financial Turbulence

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

II I IMF View of World Economy and Finance. The International Financial Institutions (IFI) consist of the International Monetary Fund, World Bank Group, Bank for International Settlements (BIS) and the multilateral development banks, which are the European Investment Bank, Inter-American Development Bank and the Asian Development Bank (Pelaez and Pelaez, International Financial Architecture (2005), The Global Recession Risk (2007), 8-19, 218-29, Globalization and the State, Vol. II (2008b), 114-48, Government Intervention in Globalization (2008c), 145-54). There are four types of contributions of the IFIs:

1. Safety Net. The IFIs contribute to crisis prevention and crisis resolution.

i. Crisis Prevention. An important form of contributing to crisis prevention is by surveillance of the world economy and finance by regions and individual countries. The IMF and World Bank conduct periodic regional and country evaluations and recommendations in consultations with member countries and jointly with other international organizations. The IMF and the World Bank have been providing the Financial Sector Assessment Program (FSAP) by monitoring financial risks in member countries that can serve to mitigate them before they can become financial crises.

ii. Crisis Resolution. The IMF jointly with other IFIs provides assistance to countries in resolution of those crises that do occur. Recently, the IMF is cooperated with the government of Greece, European Union and European Central Bank in resolving the debt difficulties of Greece as it has done in the past in numerous other circumstances. Programs with other countries involved in the European debt crisis may also be developed.

2. Surveillance. The IMF conducts surveillance of the world economy, finance and public finance with continuous research and analysis. Important documents of this effort are the World Economic Outlook (http://www.imf.org/external/ns/cs.aspx?id=29), Global Financial Stability Report (http://www.imf.org/external/pubs/ft/gfsr/index.htm) and Fiscal Monitor (http://www.imf.org/external/ns/cs.aspx?id=262).

3. Infrastructure and Development. The IFIs also engage in infrastructure and development, in particular, the World Bank Group and the multilateral development banks.

4. Soft Law. Significant activity by IFIs has consisted of developing standards and codes under multiple forums. It is easier and faster to negotiate international agreements under soft law that are not binding but can be very effective (on soft law see Pelaez and Pelaez, Globalization and the State, Vol. II (2008c), 114-25). These norms and standards can solidify world economic and financial arrangements.

The objective of this section is to analyze current projections of the IMF database for the most important indicators.

Table I-1 is constructed with the database of the IMF (https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx) to show GDP in dollars in 2018 and the growth rate of real GDP of the world and selected regional countries from 2018 to 2021. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has changed its measurement of the world economy to 3.6 percent in 2018 and reducing the forecast rate of growth to 3.0 percent in 2019, 3.4 percent in 2020 and 3.6 percent in 2021. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $38,901 billion of world output of $84,930 billion, or 45.8 percent, but are projected to grow at much lower rates than world output, 1.7 percent on average from 2018 to 2021, in contrast with 3.4 percent for the world as a whole. While the world would grow 14.3 percent in the four years from 2018 to 2021, the G7 as a whole would grow 6.9 percent. The difference in dollars of 2018 is high: growing by 14.3 percent would add around $12.1 trillion of output to the world economy, or roughly, over two times the output of the economy of Japan of $4,972 billion but growing by 6.9 percent would add $5.9 trillion of output to the world, or somewhat higher than the output of Japan in 2018. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2018 of $33,687 billion, or 39.7 percent of world output. The EMDEs would grow cumulatively 19.0 percent or at the average yearly rate of 4.4 percent, contributing $6.4 trillion from 2018 to 2021 or the equivalent of close to one half the GDP of $13,368 billion of China in 2018. The final four countries in Table I-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output in 2018 adds to $19,613 billion, or 23.1 percent of world output, which is equivalent to 50.4 percent of the combined output of the major advanced economies of the G7.

Table I-1, IMF World Economic Outlook Database Projections of Real GDP Growth

	GDP USD Billions 2018	Real GDP ∆% 2018	Real GDP ∆% 2019	Real GDP ∆% 2020	Real GDP ∆% 2021
World	84,930	3.6	3.0	3.4	3.6
G7	38,901	2.1	1.6	1.6	1.4
Canada	1,712	1.9	1.5	1.8	1.8
France	2,780	1.7	1.2	1.3	1.3
DE	3,951	1.5	0.5	1.2	1.4
Italy	2,076	0.9	0.0	0.5	0.8
Japan	4,972	0.8	0.9	0.5	0.5
UK	2,829	1.4	1.2	1.5	1.5
US	20,580	2.9	2.4	2.1	1.7
Euro Area	13,639	1.9	1.2	1.4	1.4
DE	3,951	1.5	0.5	1.2	1.4
France	2,780	1.7	1.2	1.3	1.3
Italy	2,076	0.9	0.0	0.5	0.8
POT	241	2.4	1.9	1.6	1.5
Ireland	383	8.3	4.3	3.5	3.2
Greece	218	1.9	2.0	2.2	1.7
Spain	1,428	2.6	2.2	1.9	1.7
EMDE	33,687	4.5	3.9	4.6	4.8
Brazil	1,868	1.1	0.9	2.0	2.4
Russia	1,658	2.3	1.1	1.9	2.0
India	2,719	6.8	6.1	7.0	7.4
China	13,368	6.6	6.1	5.8	5.9

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx). Table I-2 is constructed with the WEO database to provide rates of unemployment from 2017 to 2021 for major countries and regions. In fact, unemployment rates for 2017 in Table I-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high in 2017 for the countries with sovereign debt difficulties in Europe: 8.9 percent for Portugal (POT), 6.7 percent for Ireland, 21.5 percent for Greece, 17.2 percent for Spain and 11.3 percent for Italy, which is lower but still high. The G7 rate of unemployment is 5.0 percent. Unemployment rates are not likely to decrease substantially if relative slow cyclical growth persists in advanced economies.

Table I-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force

	% Labor Force 2017	% Labor Force 2018	% Labor Force 2019	% Labor Force 2020	% Labor Force 2021
World	NA	NA	NA	NA	NA
G7	5.0	4.5	4.4	4.3	4.3
Canada	6.3	5.8	5.8	6.0	6.1
France	9.4	9.1	8.6	8.4	8.3
DE	3.8	3.4	3.2	3.3	3.4
Italy	11.3	10.6	10.3	10.3	10.2
Japan	2.8	2.4	2.4	2.4	2.4
UK	4.4	4.1	3.8	3.8	4.0
US	4.4	3.9	3.7	3.5	3.5
Euro Area	9.1	8.2	7.7	7.5	7.3
DE	3.8	3.4	3.2	3.3	3.4
France	9.4	9.1	8.6	8.4	8.3
Italy	11.3	10.6	10.3	10.3	10.2
POT	8.9	7.0	6.1	5.6	5.4
Ireland	6.7	5.8	5.5	5.2	5.1
Greece	21.5	19.3	17.8	16.8	15.7
Spain	17.2	15.3	13.9	13.2	12.7
EMDE	NA	NA	NA	NA	NA
Brazil	12.8	12.3	11.8	10.8	10.0
Russia	5.2	4.8	4.6	4.7	4.7
India	NA	NA	NA	NA	NA
China	3.9	3.8	3.8	3.8	3.8

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries)

Source: IMF World Economic Outlook

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

The database of the WEO (https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx) is used to construct the debt/GDP ratios of regions and countries in Table I-3. The concept used is general government debt, which consists of central government debt, such as Treasury debt in the US, and all state and municipal debt. Net debt is provided for all countries except for the only available gross debt for China, Russia and India. The net debt/GDP ratio of the G7 increases from 87.0 in 2017 to 88.7 in 2021. G7 debt is pulled by the high debt of Japan that reaches 154.4 percent of GDP in 2021. US general government debt increases from 81.6 percent of GDP in 2017 to 86.0 percent of GDP in 2021. Debt/GDP ratios of countries with sovereign debt difficulties in Europe are particularly worrisome. General government net debts of Italy, Greece and Portugal exceed 100 percent of GDP or are expected to exceed 100 percent of GDP by 2021. The only country in that group with relatively lower debt/GDP ratio is Spain with 84.7 in 2016, stabilizing to 81.2 in 2021. Ireland’s debt/GDP ratio decreases from 59.7 in 2017 to 49.7 in 2021. Fiscal adjustment, voluntary or forced by defaults, may squeeze further economic growth and employment in many countries as analyzed by Blanchard (2012WEOApr). Defaults could feed through exposures of banks and investors to financial institutions and economies in countries with sounder fiscal affairs.

Table I-3, IMF World Economic Outlook Database Projections, General Government Net Debt as Percent of GDP

	% Debt/ GDP 2017	% Debt/ GDP 2018	% Debt/ GDP 2019	% Debt/ GDP 2020	% Debt/ GDP 2021
World	NA	NA	NA	NA	NA
G7	87.0	85.9	86.4	87.8	88.7
Canada	27.6	26.8	26.4	25.7	24.8
France	89.5	89.5	90.4	90.4	90.1
DE	45.6	42.7	40.1	37.8	35.8
Italy	119.2	120.2	121.3	122.0	122.4
Japan	151.1	153.2	153.8	153.7	154.4
UK	77.5	77.5	76.1	75.4	75.2
US	81.6	80.0	80.9	83.9	86.0
Euro Area	71.8	70.0	68.9	67.6	66.5
DE	45.6	42.7	40.1	37.8	35.8
France	89.5	89.5	90.4	90.4	90.1
Italy	119.2	120.2	121.3	122.0	122.4
POT	116.5	114.1	112.1	108.4	105.3
Ireland	59.7	55.1	53.0	51.4	49.7
Greece*	179.3	184.9	176.6	171.4	167.1
Spain	84.7	83.1	82.8	82.1	81.2
EMDE*	48.3	50.6	53.3	55.7	57.6
Brazil	51.6	54.2	58.1	61.0	62.2
Russia*	15.5	14.6	16.5	17.7	18.3
India*	67.8	68.1	69.0	68.5	67.7
China*	46.8	50.6	55.6	60.9	65.4

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); *General Government Gross Debt as percent of GDP

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

The primary balance consists of revenues less expenditures but excluding interest revenues and interest payments. It measures the capacity of a country to generate sufficient current revenue to meet current expenditures. There are various countries with primary surpluses in 2017: Germany 2.1 percent and Italy 1.2 percent. There are also various countries with expected primary surpluses by 2021: Portugal 3.6 percent, Italy 0.5 percent and so on. Most countries in Table I-4 face significant fiscal adjustment in the future without “fiscal space.” Investors in government securities may require higher yields when the share of individual government debts hit saturation shares in portfolios. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_{t, t+τ})s_t+τdτ (1)

Equation (1) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_{t, t+τ}, of the future primary surpluses s_t+τ, which are equal to T_t+τ – G_t+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_{t, t+τ}. Expectations by investors of future primary balances of indebted governments may be less optimistic than those in Table I-4 because of government revenues constrained by low growth and government expenditures rigid because of entitlements. Political realities may also jeopardize structural reforms and fiscal austerity.

Table I-4, IMF World Economic Outlook Database Projections of General Government Primary Net Lending/Borrowing as Percent of GDP

	% GDP 2017	% GDP 2018	% GDP 2019	% GDP 2020	% GDP 2021
World	NA	NA	NA	NA	NA
G7	-1.5	-2.0	-2.3	-2.1	-2.1
Canada	0.0	-0.1	-0.5	-0.5	-0.3
France	-1.1	-0.9	-1.8	-1.0	-1.1
DE	2.1	2.6	1.8	1.5	1.1
Italy	1.2	1.4	1.4	0.7	0.5
Japan	-2.7	-2.9	-2.9	-2.2	-2.0
UK	-0.1	0.1	0.0	-0.1	0.0
US	-2.5	-3.5	-3.6	-3.6	-3.4
Euro Area	0.8	1.1	0.7	0.6	0.4
DE	2.1	2.6	1.8	1.5	1.1
France	-1.1	-0.9	-1.8	-1.0	-1.1
Italy	1.2	1.4	1.4	0.7	0.5
POT	0.7	2.8	2.9	3.2	3.6
Ireland	1.6	1.6	1.5	1.4	1.4
Greece	4.2	4.3	3.3	2.6	2.5
Spain	-0.7	-0.2	0.0	0.2	0.2
EMDE	-2.3	-2.0	-2.8	-2.9	-2.8
Brazil	-1.8	-1.7	-1.9	-1.4	-0.6
Russia	-1.0	3.4	1.4	0.7	0.3
India	-2.3	-1.6	-2.5	-2.4	-2.4
China	-3.0	-3.8	-5.0	-5.1	-4.9

*General Government Net Lending/Borrowing

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries)

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

The database of the World Economic Outlook of the IMF ()https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx is used to obtain government net lending/borrowing as percent of GDP in Table I-5. Interest on government debt is added to the primary balance to obtain overall government fiscal balance in Table I-5. For highly indebted countries there is an even tougher challenge of fiscal consolidation. Adverse expectations on the success of fiscal consolidation may drive up yields on government securities that could create hurdles to adjustment, growth and employment.

Table I-5, IMF World Economic Outlook Database Projections of General Government Net Lending/Borrowing as Percent of GDP

	% GDP 2017	% GDP 2018	% GDP 2019	% GDP 2020	% GDP 2021
World	NA	NA	NA	NA	NA
G7	-3.1	-3.6	-3.8	-3.6	-3.6
Canada	-0.3	-0.4	-0.7	-0.7	-0.6
France	-2.8	-2.5	-3.3	-2.4	-2.4
DE	1.2	1.9	1.1	1.0	0.7
Italy	-2.4	-2.1	-2.0	-2.5	-2.6
Japan	-3.2	-3.2	-3.0	-2.2	-1.9
UK	-1.8	-1.4	-1.4	-1.5	-1.5
US	-4.5	-5.7	-5.6	-5.5	-5.5
Euro Area	-1.0	-0.5	-0.9	-0.9	-0.9
DE	1.2	1.9	1.1	1.0	0.7
France	-2.8	-2.5	-3.3	-2.4	-2.4
Italy	-2.4	-2.1	-2.0	-2.5	-2.6
POT	-2.9	-0.4	-0.2	0.1	0.8
Ireland	-0.3	0.0	0.0	0.2	0.3
Greece	1.1	1.0	-0.3	-1.0	-1.1
Spain	-3.1	-2.5	-2.2	-1.9	-1.9
EMDE	-4.2	-3.8	-4.8	-4.9	-4.9
Brazil	-7.9	-7.2	-7.5	-6.9	-6.6
Russia	-1.5	2.9	1.0	0.1	-0.3
India	-7.0	-6.4	-7.5	-7.2	-7.0
China	-3.9	-4.8	-6.1	-6.3	-6.2

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries)

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

There were some hopes that the sharp contraction of output during the global recession would eliminate current account imbalances. Table I-6 constructed with the database of the WEO (https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx) shows that external imbalances have been maintained in the form of current account deficits and surpluses. China’s current account surplus is 1.6 percent of GDP for 2017 and is projected to stabilize at 0.8 percent of GDP in 2021. At the same time, the current account deficit of the US is 2.3 percent of GDP in 2017 and is projected at 2.5 percent of GDP in 2021. The current account surplus of Germany is 8.1 percent for 2017 and remains at a high 6.2 percent of GDP in 2021. Japan’s current account surplus is 4.2 percent of GDP in 2017 and stabilizes to 3.3 percent of GDP in 2021.

Table I-6, IMF World Economic Outlook Databank Projections, Current Account of Balance of Payments as Percent of GDP

	% CA/ GDP 2017	% CA/ GDP 2018	% CA/ GDP 2019	% CA/ GDP 2020	% CA/ GDP 2021
World	NA	NA	NA	NA	NA
G7	-0.1	-0.4	-0.5	-0.5	-0.5
Canada	-2.8	-2.6	-1.9	-1.7	-1.7
France	-0.7	-0.6	-0.5	-0.5	-0.4
DE	8.1	7.3	7.0	6.6	6.2
Italy	2.6	2.5	2.9	2.9	2.8
Japan	4.2	3.5	3.3	3.3	3.3
UK	-3.3	-3.9	-3.5	-3.7	-3.7
US	-2.3	-2.4	-2.5	-2.6	-2.5
Euro Area	3.2	2.9	2.8	2.7	2.6
DE	8.1	7.3	7.0	6.6	6.2
France	-0.7	-0.6	-0.5	-0.5	0.4
Italy	2.6	2.5	2.9	2.9	2.8
POT	0.4	-0.6	-0.6	-0.7	-0.7
Ireland	0.5	10.6	10.8	9.6	8.6
Greece	-2.4	-3.5	-3.0	-3.3	-3.6
Spain	1.8	0.9	0.9	1.0	1.0
EMDE	-0.2	0.0	-0.1	-0.4	-0.5
Brazil	-0.4	-0.8	-1.2	-1.0	-1.1
Russia	2.1	6.8	5.7	3.9	3.4
India	-1.8	-2.1	-2.0	-2.3	-2.3
China	1.6	0.4	1.0	0.9	0.8

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries)

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

The G7 meeting in Washington on Apr 21, 2006 of finance ministers and heads of central bank governors of the G7 established the “doctrine of shared responsibility” (G7 2006Apr):

“We, Ministers and Governors, reviewed a strategy for addressing global imbalances. We recognized that global imbalances are the product of a wide array of macroeconomic and microeconomic forces throughout the world economy that affect public and private sector saving and investment decisions. We reaffirmed our view that the adjustment of global imbalances:

• Is shared responsibility and requires participation by all regions in this global process;
• Will importantly entail the medium-term evolution of private saving and investment across countries as well as counterpart shifts in global capital flows; and
• Is best accomplished in a way that maximizes sustained growth, which requires strengthening policies and removing distortions to the adjustment process.

In this light, we reaffirmed our commitment to take vigorous action to address imbalances. We agreed that progress has been, and is being, made. The policies listed below not only would be helpful in addressing imbalances, but are more generally important to foster economic growth.

• In the United States, further action is needed to boost national saving by continuing fiscal consolidation, addressing entitlement spending, and raising private saving.
• In Europe, further action is needed to implement structural reforms for labor market, product, and services market flexibility, and to encourage domestic demand led growth.
• In Japan, further action is needed to ensure the recovery with fiscal soundness and long-term growth through structural reforms.

Others will play a critical role as part of the multilateral adjustment process.

• In emerging Asia, particularly China, greater flexibility in exchange rates is critical to allow necessary appreciations, as is strengthening domestic demand, lessening reliance on export-led growth strategies, and actions to strengthen financial sectors.

• In oil-producing countries, accelerated investment in capacity, increased economic diversification, enhanced exchange rate flexibility in some cases.

• Other current account surplus countries should encourage domestic consumption and investment, increase micro-economic flexibility and improve investment climates.

We recognized the important contribution that the IMF can make to multilateral surveillance.”

The concern at that time was that fiscal and current account global imbalances could result in disorderly correction with sharp devaluation of the dollar after an increase in premiums on yields of US Treasury debt (see Pelaez and Pelaez, The Global Recession Risk (2007)). The IMF was entrusted with monitoring and coordinating action to resolve global imbalances. The G7 was eventually broadened to the formal G20 in the effort to coordinate policies of countries with external surpluses and deficits.

The database of the WEO (https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx) is used to construct Table I-7 with fiscal and current account imbalances projected for 2018 and 2019. The WEO finds the need to rebalance external and domestic demand (IMF 2011WEOSep xvii):

“Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.”

The IMF (2012WEOApr, XVII) explains decreasing importance of the issue of global imbalances as follows:

“The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in .surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.”

The IMF (http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/c4.pdf) analyzes global imbalances as:

• Global current account imbalances have narrowed by more than a third from

their peak in 2006. Key imbalances—the large deficit of the United States and

the large surpluses of China and Japan—have more than halved.

• The narrowing in imbalances has largely been driven by demand contraction

(“expenditure reduction”) in deficit economies.

• Exchange rate adjustment has facilitated rebalancing in China and the United

States, but in general the contribution of exchange rate changes (“expenditure

switching”) to current account adjustment has been relatively modest.

• The narrowing of imbalances is expected to be durable, as domestic demand in

deficit economies is projected to remain well below pre-crisis trends.

• Since flow imbalances have narrowed but not reversed, net creditor and debtor

positions have widened further. Weak growth has also contributed to still high

ratios of net external liabilities to GDP in some debtor economies.

• Risks of a disruptive adjustment in global current account balances have

decreased, but global demand rebalancing remains a policy priority. Stronger

external demand will be instrumental for reviving growth in debtor countries and

reducing their net external liabilities.”

Table I-7, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2016 Dollar GDP

	GDP $B 2018	FD %GDP 2018	CAD %GDP 2018	Debt %GDP 2018	FD%GDP 2019	CAD%GDP 2019	Debt %GDP 2019
US	20580	-3.5	-2.4	80.0	-3.6	-2.5	80.9
Japan	4972	-2.9	3.5	153.2	-2.9	3.3	153.8
UK	2829	0.1	-3.9	77.5	0.0	-3.5	76.1
Euro	13639	1.1	2.9	70.0	0.7	2.8	68.9
Ger	3951	2.6	7.3	42.7	1.8	7.0	40.1
France	2780	-0.9	-0.6	89.5	-1.8	-0.5	90.4
Italy	2076	1.4	2.5	120.2	1.4	2.9	121.3
Can	1712	-0.1	-2.6	26.8	-0.5	-1.9	26.4
China	13368	-3.8	1.4	50.6	-5.0	0.4	55.6
Brazil	1868	-1.7	-0.8	54.2	-1.9	-1.2	58.1

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

FD is primary except total for China; Debt is net except gross for China

Source: IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30, 2011, the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt exceeding 100 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:

“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”

If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.

The prospects of survival of the euro zone are dire. Table I-8 is constructed with IMF World Economic Outlook database (https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2019.

Table I-8, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2019 USD Billions	Primary Net Lending Borrowing % GDP 2019	General Government Net Debt % GDP 2019
World	86,599
Euro Zone	13,314	0.7	68.9
Portugal	236	2.9	112.1
Ireland	385	1.5	53.0
Greece	214	3.3	176.6**
Spain	1,398	0.0	82.8
Major Advanced Economies G7	39,627	-1.8	86.4
United States	21,439	-3.6	80.9
UK	2,744	0.0	76.1
Germany	3,863	1.8	40.1
France	2,707	-1.8	90.4
Japan	5,154	-2.9	153.8
Canada	1,731	-0.5	26.4
Italy	1,989	1.4	121.3
China	14,140	-5.0	55.6***

*Net Lending/borrowing**Gross Debt

Source: IMF World Economic Outlook

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

The data in Table I-8 are used for some very simple calculations in Table I-9. The column “Net Debt USD Billions 2019” in Table I-9 is generated by applying the percentage in Table I-8 column “General Government Net Debt % GDP 2019” to the column “GDP 2019 USD Billions.” The total debt of France and Germany in 2019 is $3996.2 billion, as shown in row “B+C” in column “Net Debt USD Billions 2019.” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $4416.8 billion, adding rows D+E+F+G+H in column “Net Debt USD billions 2019.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table I-9. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8413.0 billion, which would be equivalent to 128.1 percent of their combined GDP in 2019. Under this arrangement, the entire debt of selected members of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 213.7 percent if including debt of France and 154.4 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks. Analysis of fiscal stress is quite difficult without including another global recession in an economic cycle that is already mature by historical experience.

Table I-9, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions 2019	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	6,360.6
B Germany	1,549.1		$8413.0 as % of $3863 =217.8% $5965.9 as % of $3863 =154.4%
C France	2,447.1
B+C	3,996.2	GDP $6570 Total Debt $8,413.0 Debt/GDP: 128.1%
D Italy	2,412.7
E Spain	1,157.5
F Portugal	264.6
G Greece	377.9
H Ireland	204.1
Subtotal D+E+F+G+H	4,416.8

Source: calculation with IMF data IMF World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

World trade projections of the IMF are in Table I-10. There is decreasing growth of the volume of world trade of goods and services from 3.6 percent in 2018 to 1.1 percent in 2019, stabilizing to 3.2 percent in 2020. Growth stabilizes at 3.3 percent on average from 2018 to 2024. World trade would be slower for advanced economies while emerging and developing economies (EMDE) experience faster growth. World economic slowdown would be more challenging with lower growth of world trade.

Table I-10, IMF, Projections of World Trade, USD Billions, USD/Barrel and Annual ∆%

	2018	2019	2020	Average ∆% 2018-2024
World Trade Volume (Goods and Services)	3.6	1.1	3.2	3.3
Exports Goods & Services	3.4	1.3	3.1	3.5
Imports Goods & Services	3.8	1.0	3.3	3.4
Exports Goods & Services
G7	2.6	0.7	2.2	2.5
EMDE	3.9	1.9	4.1	4.1
Imports Goods & Services
G7	3.2	1.5	2.6	2.7
EMDE	5.1	0.7	4.3	4.3
Terms of Trade Goods & Services
G7	-0.7	0.6	0.3	0.0
EMDE	1.5	-1.3	-1.1	-0.2
World Crude Oil Price $/Barrel	68.3	61.8	57.9	58.3

Crude Oil: Simple Average of three spot prices: Dated Brent, West Texas Intermediate and the Dubai Fateh

Source: International Monetary Fund World Economic Outlook databank

https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx

IIB United States Current Account and Net International Investment Position. The current account of the US balance of payments is in Table VI-3A for IIQ2018 and IIQ2019. The Bureau of Economic Analysis analyzes as follows (https://www.bea.gov/system/files/2019-09/trans219.pdf):

“The U.S. current account deficit, which reflects the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries, narrowed by $8.0 billion, or 5.9 percent, to $128.2 billion in the second quarter of 2019, according to statistics from the U.S. Bureau of Economic Analysis (BEA). The revised first quarter deficit was $136.2 billion. The second quarter deficit was 2.4 percent of current dollar gross domestic product, down from 2.6 percent in the first quarter. The $8.0 billion narrowing of the current account deficit in the second quarter mainly reflected an expanded surplus on primary income.”

The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US not seasonally adjusted increased from $117.7 billion in IIQ2018 to $138.3 billion in IIQ2019. The current account deficit seasonally adjusted at annual rate increased from 2.1 percent of GDP in IIQ2018 to 2.6 percent of GDP in IQ2019, decreasing to 2.4 percent of GDP in IIQ2019. The ratio of the current account deficit to GDP has stabilized below 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). There is still a major challenge in the combined deficits in current account and in federal budgets.

Table VI-3A, US, Balance of Payments, Millions of Dollars NSA

	IIQ2018	IIQ2019	Difference
Goods Balance	-207,828	-225,097	17,269
X Goods	431,039	417,389	-3.2 ∆%
M Goods	-638,867	-642,486	0.6 ∆%
Services Balance	56,132	50,396	-5,736
X Services	200,590	202,962	1.2 ∆%
M Services	-144,457	-152,566	5.6 ∆%
Balance Goods and Services	-151,696	-174,701	-23,005
Exports of Goods and Services and Income Receipts	941,047	940,593	-454
Imports of Goods and Services and Income Payments	-1,058,701	-1,078,919	-20,218
Current Account Balance	-117,653	-138,326	-20,673
% GDP	IIQ2018	IIQ2019	IQ2019
	2.1	2.4	2.6

X: exports; M: imports

Balance on Current Account = Exports of Goods and Services – Imports of Goods and Services and Income Payments

Source: Bureau of Economic Analysis

http://www.bea.gov/international/index.htm#bop

Chart VI-3B1, US, Current Account and Components Balances, Quarterly SA

Source: https://www.bea.gov/news/2019/us-international-transactions-first-quarter-2019-and-annual-update

Chart VI-3B1, US, Current Account and Components Balances, Quarterly SA

Source: https://www.bea.gov/news/2019/us-international-transactions-2nd-quarter-2019

Chart VI-3B2, US, Current Account and Components Balances, Quarterly SA

Source: https://www.bea.gov/news/2019/us-international-transactions-2nd-quarter-2019

The Bureau of Economic Analysis (BEA) provides analytical insight and data on the 2017 Tax Cuts and Job Act:

“In the international transactions accounts, income on equity, or earnings, of foreign affiliates of U.S. multinational enterprises consists of a portion that is repatriated to the parent company in the United States in the form of dividends and a portion that is reinvested in foreign affiliates. In response to the 2017 Tax Cuts and Jobs Act, which generally eliminated taxes on repatriated earnings, some U.S. multinational enterprises repatriated accumulated prior earnings of their foreign affiliates. In the first, second, and fourth quarters of 2018, the repatriation of dividends exceeded current-period earnings, resulting in negative values being recorded for reinvested earnings. In the first quarter of 2019, dividends were $100.2 billion while reinvested earnings were $40.2 billion (see table below). The reinvested earnings are also reflected in the net acquisition of direct investment assets in the financial account (table 6). For more information, see "How does the 2017 Tax Cuts and Jobs Act affect BEA’s business income statistics?" and "How are the international transactions accounts affected by an increase in direct investment dividend receipts?"”

Chart VI-3B, US, Direct Investment Earnings Receipts and Components

Source: https://www.bea.gov/news/2019/us-international-transactions-first-quarter-2019-and-annual-update

In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”

The alternative fiscal scenario of the CBO (2012NovCDR, 2013Sep17) resembles an economic world in which eventually the placement of debt reaches a limit of what is proportionately desired of US debt in investment portfolios. This unpleasant environment is occurring in various European countries.

The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.

First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:

D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)

Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,

{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:

N(t+1) = (1+n)N(t), n>-1 (2)

The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:

B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)

On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.

Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_{t, t+τ})s_t+τdτ (4)

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_{t, t+τ}, of the future primary surpluses s_t+τ, which are equal to T_t+τ – G_t+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_{t, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (5)

Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):

“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”

An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.

There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:

(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress

(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality

(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.

This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.

The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net relative to financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):

“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”

The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below trend. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. In the release of Jun 14, 2013, the Bureau of Economic Analysis (http://www.bea.gov/newsreleases/international/transactions/2013/pdf/trans113.pdf) informs of revisions of US data on US international transactions since 1999:

“The statistics of the U.S. international transactions accounts released today have been revised for the first quarter of 1999 to the fourth quarter of 2012 to incorporate newly available and revised source data, updated seasonal adjustments, changes in definitions and classifications, and improved estimating methodologies.”

The BEA introduced new concepts and methods (http://www.bea.gov/international/concepts_methods.htm) in comprehensive restructuring on Jun 18, 2014 (http://www.bea.gov/international/modern.htm):

“BEA introduced a new presentation of the International Transactions Accounts on June 18, 2014 and will introduce a new presentation of the International Investment Position on June 30, 2014. These new presentations reflect a comprehensive restructuring of the international accounts that enhances the quality and usefulness of the accounts for customers and bring the accounts into closer alignment with international guidelines.”

Table IIA2-3 provides data on the US fiscal and balance of payments imbalances incorporating all revisions and methods. In 2007, the federal deficit of the US was $161 billion corresponding to 1.1 percent of GDP while the Congressional Budget Office estimates the federal deficit in 2012 at $1087 billion or 6.8 percent of GDP. The estimate of the deficit for 2013 is $680 billion or 4.1 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5094 billion or 31.6 percent of the estimate of GDP for fiscal year 2012 implicit in the CBO (CBO 2013Sep11) estimate of debt/GDP. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.094 trillion in four years, using the fiscal year deficit of $1087 billion for fiscal year 2012, which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, slightly less than the combined deficits from 2009 to 2012 of $5094 billion. Federal debt in 2012 was 70.4 percent of GDP (CBO 2015Jan26) and 72.6 percent of GDP in 2013 (http://www.cbo.gov/). This situation may worsen in the future (CBO 2013Sep17):

“Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy. Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.

The gap between federal spending and revenues would widen steadily after 2015 under the assumptions of the extended baseline, CBO projects. By 2038, the deficit would be 6½ percent of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 100 percent of GDP, more than in any year except 1945 and 1946. With such large deficits, federal debt would be growing faster than GDP, a path that would ultimately be unsustainable.

Incorporating the economic effects of the federal policies that underlie the extended baseline worsens the long-term budget outlook. The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline. Those economic differences would lead to lower federal revenues and higher interest payments. With those effects included, debt under the extended baseline would rise to 108 percent of GDP in 2038.”

The most recent CBO long-term budget on Jun 26, 2018 projects US federal debt at 152.0 percent of GDP in 2048 (Congressional Budget Office, The 2018 long-term budget outlook. Washington, DC, Jun 26 https://www.cbo.gov/publication/53919).

Table VI-3B, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %

	2007	2008	2009	2010	2011
Goods & Services	-705	-709	-384	-495	-549
Primary Income	85	130	115	168	211
Secondary Income	-91	-102	-104	-104	-107
Current Account	-711	-681	-373	-431	-445
NGDP	14452	14713	14449	14992	15543
Current Account % GDP	-4.9	-4.6	-2.6	-2.9	-2.9
NIIP	-1279	-3995	-2628	-2512	-4455
US Owned Assets Abroad	20705	19423	19426	21767	22209
Foreign Owned Assets in US	21984	23418	22054	24279	26664
NIIP % GDP	-8.8	-27.1	-18.2	-16.8	-28.7
Exports Goods, Services and Income	2559	2742	2283	2625	2983
NIIP % Exports Goods, Services and Income	-50	-145	-115	-95	-149
DIA MV	5858	3707	4945	5486	5215
DIUS MV	4134	3091	3619	4099	4199
Fiscal Balance	-161	-459	-1413	-1294	-1300
Fiscal Balance % GDP	-1.1	-3.1	-9.8	-8.7	-8.5
Federal   Debt	5035	5803	7545	9019	10128
Federal Debt % GDP	35.2	39.3	52.3	60.9	65.9
Federal Outlays	2729	2983	3518	3457	3603
∆%	2.8	9.3	17.9	-1.7	4.2
% GDP	19.1	20.2	24.4	23.4	23.4
Federal Revenue	2568	2524	2105	2163	2303
∆%	6.7	-1.7	-16.6	2.7	6.5
% GDP	17.9	17.1	14.6	14.6	15.0

	2012	2013	2014	2015	2016
Goods & Services	-537	-462	-490	-500	-505
Primary Income	207	206	210	181	173
Secondary Income	-97	-94	-94	-115	-120
Current Account	-426	-350	-374	-434	-452
NGDP	16197	16785	17522	18219	18707
Current Account % GDP	-2.6	-2.1	-2.1	-2.4	-2.4
NIIP	-4518	-5369	-6945	-7462	-8182
US Owned Assets Abroad	22562	24145	24883	23431	24061
Foreign Owned Assets in US	27080	29513	31828	30892	32242
NIIP % GDP	-27.9	-32.0	-39.6	-41.0	-43.7
Exports Goods, Services and Income	3096	3212	3333	3173	3157
NIIP % Exports Goods, Services and Income	-146	-167	-208	-235	-259
DIA MV	5969	7121	72421	7057	7422
DIUS MV	4662	5815	6370	6729	7596
Fiscal Balance	-1087	-680	-485	-439	-585
Fiscal Balance % GDP	-6.8	-4.1	-2.8	-2.4	-3.2
Federal   Debt	11281	11983	12780	13117	14168
Federal Debt % GDP	70.4	72.6	74.1	72.9	76.7
Federal Outlays	3537	3455	3506	3688	3853
∆%	-1.8	-2.3	1.5	5.2	4.5
% GDP	22.1	20.9	20.3	20.5	20.9
Federal Revenue	2450	2775	3022	3250	3268
∆%	6.4	13.3	8.9	7.6	0.6
% GDP	15.3	16.8	17.5	18.1	17.7
	2017
Goods & Services	-568
Primary Income	217
Secondary Income	-115
Current Account	-466
NGDP	19485
Current Account % GDP	2.4
NIIP	-7725
US Owned Assets Abroad	27799
Foreign Owned Assets in US	35524
NIIP % GDP	-39.6
Exports Goods, Services and Income	3408
NIIP % Exports Goods, Services and Income	-227
DIA MV	8910
DIUS MV	8925
Fiscal Balance	-665
Fiscal Balance % GDP	-3.5
Federal   Debt	14666
Federal Debt % GDP	76.5
Federal Outlays	3982
∆%	3.3
% GDP	20.8
Federal Revenue	3316
∆%	1.5
% GDP	17.3

Sources:

Notes: NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which the original number of the CBO source is maintained. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Jun 2014 http://www.bea.gov/international/concepts_methods.htm These discrepancies do not alter conclusions. Budget http://www.cbo.gov/

https://www.cbo.gov/about/products/budget-economic-data#6

https://www.cbo.gov/about/products/budget_economic_data#3

https://www.cbo.gov/about/products/budget-economic-data#2

https://www.cbo.gov/about/products/budget_economic_data#2 Balance of Payments and NIIP http://www.bea.gov/international/index.htm#bop Gross Domestic Product, , Bureau of Economic Analysis (BEA) http://www.bea.gov/iTable/index_nipa.cfm

Table VI-3C provides quarterly estimates NSA of the external imbalance of the United States. The current account deficit seasonally adjusted at 2.1 percent in IIQ2018 increases to 2.4 percent in IIIQ2018. The current account deficit increases to 2.8 percent in IVQ2018. The current account deficit decreases to 2.6 percent in IQ2019. The current account deficit decreases to 2.4 percent in IIQ2019. The absolute value of the net international investment position increases from minus $8.9 trillion in IIQ2018 to minus $9.7 trillion in IIIQ2018. The absolute value of the net international investment position stabilizes to $9.6 trillion in IIIQ2018. The absolute value of the net international investment position increases at $10.1 trillion in IQ2019. The absolute value of the net international investment position stabilizes to $10.1 trillion in IIQ2019. The BEA explains as follows (https://www.bea.gov/system/files/2019-09/intinv219.pdf):

“The U.S. net international investment position, the difference between U.S. residents’ foreign financial assets and liabilities, was –$10.56 trillion at the end of the second quarter of 2019, according to statistics released by the U.S. Bureau of Economic Analysis (BEA). Assets totaled $28.01 trillion and liabilities were $38.56 trillion.

At the end of the first quarter, the net investment position was –$10.16 trillion (Table1.”

The BEA explains further (https://www.bea.gov/system/files/2019-09/intinv219.pdf):

“U.S. assets increased by $952.7 billion, to a total of $28.01 trillion, at the end of the second quarter, reflecting increases in all major categories of assets, particularly in portfolio investment and direct investment assets. Portfolio investment assets increased by $366.4 billion, to $12.68 trillion, and direct investment assets increased by $232.8 billion, to $8.39 trillion. These increases were driven mainly by foreign stock price increases that raised the value of these assets.

U.S. liabilities increased by $1.35 trillion, to a total of $38.56 trillion, at the end of the second quarter, reflecting increases in all major categories of liabilities, particularly in portfolio investment liabilities. Portfolio investment liabilities increased by $665.3 billion, to $20.62 trillion, driven mainly by U.S. stock and bond price increases that raised the value of these liabilities.”

Table VI-3C, US, Current Account, Net International Investment Position and Direct Investment, Dollar Billions, NSA

	IIQ2018	IIIQ2018	IVQ2018	IQ2019	IIQ2019
Goods & Services	-152	-174	-178	-126	-174
Primary Income	62	63	60	58	67
Secondary Income	-28	-28	-33	-37	-31
Current Account	-118	-139	-151	-105	-138
Current Account % GDP SA	-2.1	-2.4	-2.8	-2.6	2.4
NIIP	-8906	-9701	-9555	-10057	-10055
US Owned Assets Abroad	26962	27062	25241	27056	28009
Foreign Owned Assets in US	-35868	-36763	-34796	-37213	-38564
DIA MV	8422	8489	7504	8153	8386
DIA MV Equity	7111	7176	6184	6878	7118
DIUS MV	9004	9606	8583	9470	9799
DIUS MV Equity	7272	7854	6797	7726	8033

Notes: NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Jun 2014 http://www.bea.gov/international/concepts_methods.htm

Chart VI-3CA of the US Bureau of Economic Analysis provides the quarterly and annual US net international investment position (NIIP) NSA in billion dollars. The NIIP deteriorated in 2008, improving in 2009-2011 followed by deterioration after 2012. There is improvement in 2017 and deterioration in 2018.

Chart VI-3CA, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

Chart VI-3C, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

Chart VI-3C1 provides the quarterly NSA NIIP.

Chart VI-3C1, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

Chart VI-3C2 updates annual and quarterly estimates of the US Net International Investment Position. There is continuing deterioration.

Chart VI-3C2, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

Chart VI-3C2 updates quarterly estimates of the US Net International Investment Position. There is continuing deterioration.

Chart VI-3C3, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

IIC Decline of United States Homeownership. The US Census Bureau measures the homeownership rate by “dividing the number of owner-occupied housing units by the number of occupied housing units or households” (https://www.census.gov/housing/hvs/index.html). The rate of homeownership of the US quarterly from 1965 to 2019 is in Table IIA-3. The rate of homeownership increased from 63.5 in IQ1966 to 64.4 in IVQ1969. The rate of homeownership rose from 64.0 in IVQ1970 to 65.5 in IVQ1980, declining to 63.8 in IVQ1989. The rate of homeownership increased to 66.9 in IVQ1999, reaching 69.0 in IVQ2005. The rate of homeownership fell to 64.8 in IIIQ2019.

Table IIA-3, US, Home Ownership Rate, 1965-2019, NSA, %

Year	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
1956	NA	NA	NA	NA
1957	NA	NA	NA	NA
1958	NA	NA	NA	NA
1959	NA	NA	NA	NA
1960	NA	NA	NA	NA
1961	NA	NA	NA	NA
1962	NA	NA	NA	NA
1963	NA	NA	NA	NA
1964	NA	NA	NA	NA
1965	62.9	62.9	62.9	63.4
1966	63.5	63.2	63.3	63.8
1967	63.3	63.9	63.8	63.5
1968	63.6	64.1	64.1	63.6
1969	64.1	64.4	64.4	64.4
1970	64.3	64	64.4	64
1971	64	64.1	64.4	64.5
1972	64.3	64.5	64.3	64.4
1973	64.9	64.4	64.4	64.4
1974	64.8	64.8	64.6	64.4
1975	64.4	64.9	64.6	64.5
1976	64.6	64.6	64.9	64.8
1977	64.8	64.5	65	64.9
1978	64.8	64.4	65.2	65.4
1979	64.8	64.9	65.8	65.4
1980	65.5	65.5	65.8	65.5
1981	65.6	65.3	65.6	65.2
1982	64.8	64.9	64.9	64.5
1983	64.7	64.7	64.8	64.4
1984	64.6	64.6	64.6	64.1
1985	64.1	64.1	63.9	63.5
1986	63.6	63.8	63.8	63.9
1987	63.8	63.8	64.2	64.1
1988	63.7	63.7	64	63.8
1989	63.9	63.8	64.1	63.8
1990	64	63.7	64	64.1
1991	63.9	63.9	64.2	64.2
1992	64	63.9	64.3	64.4
1993	64.2	64.4	64.7	64.6
1994	63.8	63.8	64.1	64.2
1995	64.2	64.7	65	65.1
1996	65.1	65.4	65.6	65.4
1997	65.4	65.7	66	65.7
1998	65.9	66	66.8	66.4
1999	66.7	66.6	67	66.9
2000	67.1	67.2	67.7	67.5
2001	67.5	67.7	68.1	68
2002	67.8	67.6	68	68.3
2003	68	68	68.4	68.6
2004	68.6	69.2	69	69.2
2005	69.1	68.6	68.8	69
2006	68.5	68.7	69	68.9
2007	68.4	68.2	68.2	67.8
2008	67.8	68.1	67.9	67.5
2009	67.3	67.4	67.6	67.2
2010	67.1	66.9	66.9	66.5
2011	66.4	65.9	66.3	66
2012	65.4	65.5	65.5	65.4
2013	65	65	65.3	65.2
2014	64.8	64.7	64.4	64
2015	63.7	63.4	63.7	63.8
2016	63.5	62.9	63.5	63.7
2017	63.6	63.7	63.9	64.2
2018	64.2	64.3	64.4	64.8
2019	64.2	64.1	64.8	NA

Source: US Census Bureau

https://www.census.gov/housing/hvs/index.html

Chart IIA-1 of the US Census Bureau provides the rate of homeownership of the US from 1965 to 2019. There are four periods in US homeownership. The rate of homeownership increased in an upward trend from 1965 to 1980. The rate fell in the 1980s and stabilized until 1995. The rate then increased sharply from 1996 to 2005. In the current period, the rate of homeownership shows the sharpest downward trend in available data from 2005 to 2017 with recent improvement/decline.

Chart IIA-1, US Home Ownership Rate, Quarterly, 1964-2019, %

Source: US Bureau of the Census

https://www.census.gov/housing/hvs/index.html

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019.