Like many of the US presidential candidates who didn’t come to Camp Alphaville earlier this year, Ted Cruz has a radical plan to alter the tax code: slash taxes on income, make it easier to save in new tax-free accounts, and make up much of the difference by introducing a sizable value-added tax.
Our first thought was that this ought to have a big impact on the US current account balance. Others may care more about the impact on the federal budget balance or aggregate incentives to work and invest, but we just can’t help bringing everything back to the balance of payments. And to us, Cruz’s plan sounds a lot like a “fiscal devaluation”. In fact, it could offset the impact of the strengthening dollar. Read more
UK chancellor George Osborne has announced new budgetary rules that aim to eliminate the current structural deficit within three years and ensure public sector net debt is falling as a share of national income by 2016-17.
Key to the new vision is a budget surplus by 2017-18.
But as the FT’s Martin Wolf warns on Friday:
…the focus on public debt alone is mistaken. Crucially, it ignores the asset side of the balance sheet altogether. Moreover, other things being equal, the bigger the fiscal surplus, the lower interest rates would be. If that encouraged a run-up of private debt, the economy might end up yet more unstable. Alas, the Office for Budget Responsibility already forecasts a big jump in household debt.
Fair question, evidently.
And to answer it, no we’re not sure. But the fact it’s even close is the point. From Nomura:
After recording a deficit every quarter for more than seven years, we expect India’s current account balance to swing into a surplus of ~1.5% of GDP in Q1 2015 compared with our current account deficit estimate of 1.6% of GDP in 2014.
The UK’s current account deficit is at its widest level in decades, and over the previous four posts we’ve managed to narrow down the cause to falling earnings from UK direct investments abroad since 2011.
In our final post, we will do our best to figure out which specific investments are to blame, as well as what all of this means for people who actually live and work in the UK.
Our main limitation is that the most detailed data end in 2012, although we can use that information to make some reasonable inferences about what has happened since then.
About half of the decline in the UK’s earnings from foreign direct investment from 2011 to 2012 came from the “information and communication” sector, which includes publishing, media, software, data processing, and telecoms. Almost all of that decline can be attributed to the European Union. So what happened? Read more
In the first three parts of our investigation into the UK’s rapidly widening current account deficit, we managed to narrow down the problem to the declining earnings of UK companies on their foreign direct investments, even though the amount of actual cash repatriated from abroad is actually much higher now than it was in 2007:
In other words, UK companies are reinvesting much less of their foreign profits back into additional FDI. In this post, we will attempt to address why this happened and what it means. Read more
In the first part of our series on the UK’s balance of payments we identified the net investment income paid to foreigners as the culprit behind the widening current account deficit. In part two, we mapped this onto the changing asset allocations of UK investors abroad and foreign investors in the UK. Now we’ll focus on the changes in the actual income payments by economic sector and the type of asset.
It’s important to stress that cross-border dividend and interest payments in and out of the UK are enormous, so while the difference between the money sent to foreigners and the income from abroad is big relative to the size of the UK economy, it is relatively small compared to the total flows:
In the first part of our investigation into the UK’s balance of payments, we attributed the sharp deterioration of the current account since 2011 to the increasingly poor returns that UK investors have been earning on their foreign assets relative to the returns that foreign investors have been getting from their holdings of UK assets.
We also looked at how the size of the UK’s gross international investment position has changed and which sectors of the economy have been growing and shrinking their balance sheets. Read more
The UK is more dependent on foreign capital than at any point since the end of WWII. Unusually, the trade deficit isn’t to blame:
(Source: Office for National Statistics, 4-quarter rolling average) Read more
On Wednesday we wrote about the growing consensus among scholars and policymakers that unencumbered financial flows are bad, focusing on some recent research from the Bank for International Settlements.
Now we want to draw your attention to a detailed historical account of the interwar and pre-crisis financial systems by Claudio Borio, Harold James, and Hyun Song Shin.
Their aim is to explain which “global imbalances” mattered and which did not. Read more
The chart is from a recent IMF working paper. Don’t celebrate too quickly, though.
Here’s a description of what has happened since the crisis: Read more
Wondering where next to focus attention after the emerging market carnage? Citi has a bank chart for you:
Courtesy of the Bundesbank (h/t Dario Perkins):
In a nutshell, the paper concludes that current account adjustment is significantly hampered in countries that are members of a monetary union. This holds particularly in comparison with floating exchange rate regimes owing to the lower level of exchange rate flexibility. Furthermore, the persistence of current account balances in member countries of a monetary union is also more pronounced than in fixed-rate regimes due to less flexible interest rates as a result of the single monetary policy.
Charts, charts, charts, from Credit Suisse at the end of last week.
Here’s an eye-opening chart if ever there was one (H/T Sean Corrigan at Diapason):
There wasn’t a lot of sunshine to melt the avalanche of UK economic data released on Tuesday.
Revised UK Q4 GDP (-0.5 per cent rather than -0.6 per cent) and the UK Q4 current account deficit (-2.9 per cent compared to -2.4 per cent in Q3) came as little surprise. It’s too early to say what impact the poor growth figure will have into 2011 — and of course these so-called final GDP estimates will continue to be updated over the next few years. Read more
From BNP Paribas’ FX team on Thursday — an update on Europe’s current account:
We mentioned last week how HSBC’s analysts were beginning to worry more about quantitative tightening (QT) moves in emerging markets than further rounds of quantitative easing (QE) in the US and Britain.
Also, as an aside, we mentioned that the threat from currency devaluation wars in the west could be small-fry in comparison. Read more
China and the US have the basis for an agreement at the summit of the Group of 20 leading nations next month on setting targets to cut trade imbalances, an adviser to the Chinese central bank has told the FT. Li Daokui said the debate had moved from the “surface issue” of nominal exchange rates to “talking about the substance of rebalancing world trade” following the weekend’s G20 summit in South Korea. The comments suggest Chinese support is building for US proposals for setting limits on current account surpluses and deficits at around 4 per cent of GDP, which were dismissed by developed-world export economies at the summit.
US officials headed to this weekend’s G20 summit in South Korea are keen on a proposal to set current account targets to control the rise of large surpluses in emerging markets — and large deficits at home, the WSJ reports. But it’s exporters in the developed world that have been most cool on the idea, with Japan calling numerical targets ‘unrealistic’ and Germany also on the attack. Reuters carries details of Treasury Secretary Tim Geithner’s letter to G20 members calling for current accounts to be overseen by the IMF. There’s another problem, notes Bloomberg — even if a deal is reached, G20 members have a terrible track record of implementing reforms they’ve agreed upon.
The Reserve Bank of India warned on Tuesday that volatile capital flows threatened to increase pressure on the country’s balance of payments, which is recording the widest current account deficit among large emerging economies, the FT reports. Analysts identify the current account deficit – which will put downward pressure on the Indian rupee – alongside double-digit inflation as the biggest challenges for the Indian economy. The Reserve Bank of India said on Tuesday that the country’s current account deficit had grown to 2.9 per cent in 2009-10 from 2.4 per cent in the previous year. One reason, the central bank said, for the deterioration in the balance of payments was a decline in an “invisible surplus”, caused in part by falling revenues to India’s prized outsourcing sector.
Paging Martin Wolf. Given recent coverage of global imbalances stalking the market and, uh, teenager-backed bonds on FT Alphaville, here’s an intriguing Goldman note on the role of demographic factors in future current account imbalances.
Intriguing, because the imbalances look like they’re going to get a bit sharper, much sooner — and with a much more middle-aged appearance. Read more
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. Read more