Chart of the Week: Neither a borrower nor a lender be

This week’s chart illustrates the scale of the global imbalances that have built up since the turn of the century. Having run a current account deficit in almost every year since the early 1980s, the US is by some margin the world’s largest debtor nation, owing residents of other countries some 25% of global GDP. Japan has long been one of the world’s main creditor nations, and has recently been joined in that regard by Germany, and surpassed by China, including Hong Kong. One of the complaints of the new US administration is that the status of the US dollar as the world’s reserve currency has caused the greenback to become overvalued, forcing the US to run a current account deficit to the detriment of its manufacturing sector.[1] There are many ways in which these imbalances might resolve themselves. Ideally, the creditor nations would raise their own domestic demand, and begin to run current account deficits, so that they might be repaid. The recent vote by the German Parliament to loosen the debt brake and raise defence spending may be seen as a small step in this direction. The risk, however, is that the imbalances resolve themselves more dramatically, and more suddenly. A return to more volatile, less predictable policy-setting by the US, particularly with regard to international trade, may cause the greenback to lose some of its attractiveness, precipitating a sharp fall in the US dollar. The imbalances apparent in our chart would narrow if this happened, but through a fall in the value of the US dollar assets held by the creditor nations, rather than by a partial repayment of that debt.

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[1] While we have some sympathy for this view, it is certainly not inevitable that the issuer of the world’s reserve currency must run a current account deficit; the UK, for example, tended to run a current account surplus when sterling was the world’s reserve currency.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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