Imbalances in the US Economy
Currency is the governor that corrects imbalances between economies.
Question: With an eight-fold increase in the Fed's balance sheet since 2008 (chart at left), how has the dollar remained so strong with with so many persistent deficits and imbalances in the US economy?
Answer: The dollar is the global reserve currency. As long as foreigners demand US government bonds then the dollar will stay strong.
Foreigners have funded our US trade deficit...
How has the US been able to run consistent trade deficits since Nixon removed us from the gold standard?
Current Account = Trade Deficit + Foreign Transfers
Transfers were consistently positive until Q3 2016. Foreign buying of US bonds balanced the negative trade deficit.
... foreigners have funded our government budget deficits...
“Right now people think central banks around the world can do whatever they want. They can’t….
I think it’s very hard for central banks to forever make up for bad policy elsewhere. And that puts them in a trap….”
Jamie Dimon, CEO of JP Morgan Chase
Davos Economic Forum 1/22/2020
...the US government debt to GDP is greater than ever
Total debt to GDP is approximately 131%, the highest in US history and higher than the level experience during World War II.
But, this time, we are heading INTO a recession, not putting soldiers back to work in the real economy.
...but foreigners stopped buying new issuance of US government debt in 2019...
Foreign Governments stopped buying US Bonds in the Q3 2016 at the same time issuance of new bonds accelerated. The Fed options were to let interest rates rise or grow their balance sheet. They started monetizing the debt. No coincidence that this also coincided with China trade negotiations.
...while consumption and government spending, at 87% of US GDP, is a poor foundation for productive economic growth
Components of US GDP 2019:
Consumption: $13.3 Trillion (70%)
Investment: $3.42 Trillion (18%)
Government Spending: $3.3 Trillion (17%)
Trade Deficit: -$950 Billion (-5%)
There have been only three times in US history that Consumption plus Government has been greater than 87%: during the Great Depression, WWII, and the Global Financial Crisis.