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.HOW LONG THE STRONG DOLLAR? 61At that point, the   needed  net capital inflow into the United States isunsustainable.How much the global investor is willing to invest in the US economyis a function of several factors, including the risk-return profile of USassets relative to financial assets of other countries, the growth of theinvestor s portfolio of wealth, transaction costs, information asymmetries,and regulation (Branson and Henderson 1985, Frenkel and Mussa 1985,Levich 1998).The US offering of financial assets in the international mar-ketplace is very big, but is it big relative to global wealth in this   sustain-ability  sense?Estimating a sustainability benchmark based on the global investor sportfolio is difficult because the empirical record is thin and internationalfinancial markets are quite innovative, tending to quickly make a bench-mark obsolete (Isard and Steckler 1985, Meade and Thomas 1993, Ventura2001).One approach is to consider US net capital inflows relative to globalsavings.By this measure, the US current account deficit absorbs about 6percent of world savings (Cooper 2001).But even if home bias2 is graduallyattenuating with financial innovation and deregulation, clearly not all ofglobal savings is available to be invested in international, much less US,assets (Lewis 1999).Suppose a global investor allocated his or her portfolioon the basis of relative real GDP shares; about 30 percent of the portfoliowould be US assets.But portfolio weights based on GDP do not reflect theimportance of return differentials for investment decisions, nor regulatoryconstraints on where investors can put their wealth.A third possiblebenchmark comes from relative stock market capitalization, which embod-ies both longer-term wealth creation and shorter-term valuation effects.If the global investor chose a portfolio to mirror the relative size of equitymarkets around the world, the share of US assets would be about 55percent (based on Morgan Stanley Capital International [MSCI] data).What evidence can we bring to bear on the sustainability question fromthe point of view of the global investor that will help us explain thebehavior of the dollar in early 2002 and help inform us about the futuredirection of the dollar?The US Current Account Deficit, ForeignPurchases of US Assets, and the DollarConsidering 2002 and looking forward into 2003, which concept of sustain-ability matters more for the behavior of the dollar? Has and will the dollarreact to the current account deficit-to-GDP ratio (or its close cousin the2.Home bias is the term used to acknowledge that investors tend to hold a higher shareof domestic assets in their portfolio of wealth than is to be expected based on risk, return,and diversification preferences alone.62 DOLLAR OVERVALUATION AND THE WORLD ECONOMYTable 3.1 Assumptions for scenarios for current account balanceand global financial wealth2002 2003 2004, 2005US real GDP1,2 (percent) 2.3 2.5 3.7, 3.5World real GDP3 (percent) 2.0 3.0 3.51.Macroeconomic Advisers, November 11, 2002: 2002, 2003.2.Economic Report of the President 2002: 2004-05.3.Macroeconomic Advisers, November 11, 2002: 2005 assumed equal to 2004.NIIP-to-GDP ratio), which measures the domestic economy s exposureto the external imbalances? Or has/will the global investor s wealth expo-sure to US assets been/be the relatively more important factor affectingthe dollar?Simple scenarios for the current account and global financial wealthare based on public forecasts for US and global growth (table 3.1).Asdetailed below, these scenarios suggest that the concept of sustainabilitybased on the current account deficit-to-GDP ratio is not the key conceptfor explaining the dollar s behavior in 2002 nor for considering sustainabil-ity in 2003.Rather, the concept based on global portfolio allocation sug-gests that the supply of US assets offered to the global marketplace hasbeen large compared to the increase in global wealth.This relatively heavydemand that the global investor buy US assets, at a time when US relativereturns appear less generous than in the late 1990s and when the globalportfolio is flush with US assets, is the key reason for the dollar deprecia-tion of the first half of 2002, and will be an important consideration in 2003.The Dollar and the Current Account DeficitConsider first the concept of sustainability based on the current accountdeficit.Reasonable assumptions for US and global growth in 2002, 2003,and through the medium term yield a current account deficit-to-GDPratio of 4.5 percent in 2002, rising to 4.9 percent in 2003, and to 6.1 percentin 2005 (figure 3.2, top graph).In 2002 and 2003, as well as for the pasttwo years, the ratios exceed the benchmark value determined from thecurrent account experience of other industrialized countries.For the United States, however, the external imbalances have not yettranslated into large financial costs.Although the net international invest-ment position turned from positive to increasingly negative in the 1990s,the United States still enjoyed net service receipts of $15 billion (0.15percent of GDP) in 2001 (figure 3.2, bottom graph).By way of comparison,inventory changes of $30 billion or more (seasonally adjusted annualrates) frequently occur from quarter to quarter in the US economy, andHOW LONG THE STRONG DOLLAR? 63Figure 3.2 Current account and sustainability: Base case, nodollar changeSource: Department of Commerce, and author s calculations.Note: Bars represent net investment income.Source: Department of Commerce, and author s calculations.64 DOLLAR OVERVALUATION AND THE WORLD ECONOMYconsumption alone is more than $7 trillion.Therefore, as large as thesecurrent account deficits appear to be in 2002 and even 2003, they are notyet large enough to engender financial costs that force an adjustment indomestic spending.Moreover, even as the negative NIIP increases to 24and 29 percent in 2002 and 2003, respectively, what little empirical evi-dence there is for industrialized countries relating the NIIP-to-GDP ratioto the exchange rate suggests that the   trigger  benchmark is much larger [ Pobierz całość w formacie PDF ]