Moving back into the realm of scary figures, a new report by Peterson Institute director Fred Bergsten predicts US net foreign debt could be headed towards $50,000bn or beyond and as much as 100 per cent of GDP as soon as 2030. That at least, writes Bergsten, will be the case if long-term fiscal consolidation is not achieved soon.
In the event the US continues on its current path, high interest rates and ultimate dollar weakness will become increasingly inevitable.
A snippet from the press release reads as follows (our emphasis):
These numbers range far beyond the recent highs of $700 billion and 6 percent of GDP for the annual deficit and $5 trillion and 30 percent of GDP for the net foreign debt. They are well above the widely accepted “danger thresholds” of 3–5 and 40 percent of GDP, respectively, when external adjustment inevitably begins to take place.
Hence it is highly unlikely that they can be financed without some combination of a substantial decline in the exchange rate of the dollar, substantial increases in US interest rates, and a decline in US economic growth. The one policy instrument that can effectively address this problem is US budget policy. Hence we must regain fiscal balance as soon as possible or else its continued likely erosion will be a chief driver of these unsustainable changes in our international economic and financial position.
Bergsten’s other observation, meanwhile, is that the current crisis occurred at least partly because the rest of the world was too willing to finance large US external deficits, generating easy monetary conditions and scope for overleveraging that in essence “gave us enough rope to hang ourselves.”
The views are based on projections formulated by William R. Cline and based on the following assumptions:
Dr. Cline projects the outlook for the US current account on the basis of two very different assumptions concerning the US fiscal position: a “benign baseline” in which the budget deficit levels off at 2 percent of GDP and a “fiscal erosion scenario,” which seems much more likely, under which that imbalance reaches 10 percent of GDP in 2030.
Even with the “benign baseline,” the US current account deficit and NIIP rise to uncomfortable levels of 6 and 70 percent of GDP, respectively, by 2030. But the difference of 8 percentage points in the fiscal deficit between the two scenarios has an enormous impact on the US international position through sharply increasing total domestic demand (and thus imports), interest payments on the rising foreign debt, and our need for foreign funding (and thus capital inflows).
The policy implication being the US must over the course of this economic cycle restore its budget position as near to balance as possible. The only way to do that, of course, will be via fiscal policy — conveniently currently headed in the opposite direction. As the release concludes:
Fiscal policy is the only tool that both is under the control of our governmental authorities and will clearly move the country’s international economic position in the right direction. Even if such a policy shift does not lead to an improvement in the external imbalance, as in fact the move to budget surplus in the Clinton years did not close the current account deficit, the stronger fiscal position would produce a more robust private investment environment that could generate the wherewithal to repay foreign creditors and still provide for domestic consumption. These global implications of fiscal policy thus add sharply to the case for early action, as soon as possible after recovery from the current crisis, to put the budget on a sustainable long-term trajectory.