Stephen Roach says that negative net domestic saving in the US and a soaring current-account deficit will weaken the greenback fast

Stephen Roach says that negative net domestic saving in the US and a soaring current-account deficit will weaken the greenback fast

The US dollar has now entered the early stages of what looks to be a sharp descent. The dollar’s real effective exchange rate (REER) fell 4.3% in the four months ending in August. The decline has been even steeper as measured by other indexes, but the REER is what matters most for trade, competitiveness, inflation, and monetary policy.

To be sure, the recent pullback only partly reverses the nearly 7% surge from February to April. During that period, the dollar benefited from the flight to safety triggered by the “sudden stop” in the global economy and world financial markets arising from the COVID-19 lockdown. Even with the recent modest correction, the greenback remains the most overvalued major currency in the world, with the REER still 34% above its July 2011 low.

I continue to expect this broad dollar index to plunge by as much as 35% by the end of 2021. This reflects three considerations: rapid deterioration in US macroeconomic imbalances, the ascendancy of the euro and the renminbi as viable alternatives, and the end of that special aura of American exceptionalism that has given the dollar Teflon-like resilience for most of the post-World War II era.

The first factor – America’s mounting imbalances – is now playing out in real time with a vengeance. The confluence of an unprecedented erosion of domestic saving and the current-account deficit – joined at the hip through arithmetic accounting identities – is nothing short of staggering.

The net national saving rate, which measures the combined depreciation-adjusted saving of businesses, households, and the government sector, plunged into negative territory at -1% in the second quarter of 2020. That had not happened since the global financial crisis of 2008-09, when net national saving fell into negative territory for nine consecutive quarters, averaging -1.7% from the second quarter of 2008 to the second quarter of 2010.

But the most important aspect of this development was the speed of the collapse. At -1% in the second quarter, the net saving rate fell fully 3.9 percentage points from the pre-COVID 2.9% reading in the first quarter. This is, by far, the sharpest one-quarter plunge in domestic saving on record, dating back to 1947.

What has triggered this unprecedented collapse in net domestic saving is no secret. COVID-19 sparked a temporary surge in personal saving that has been more than outweighed by a record expansion in the federal budget deficit. The Coronavirus Aid, Relief, and Economic Security (CARES) Act featured $1,200 relief checks to most Americans, as well as a sharp expansion of unemployment insurance benefits, both of which boosted the personal saving rate to an unheard of 33.7% in April. Absent these one-off injections, the personal saving rate quickly receded to a still-lofty 17.8% in July and is set to fall even more sharply with the recent expiration of expanded unemployment benefits.

Offsetting this was a $4.5 trillion annualized widening of the federal deficit in the second quarter of 2020 (on a net saving basis), to $5.7 trillion, which swamped the $3.1 trillion surge in net personal saving in the same period. With personal saving likely to recede sharply in the months ahead and the federal budget deficit exploding toward 16% of GDP in the current fiscal year, according to the Congressional Budget Office, the plunge in net domestic saving in the second quarter of 2020 is only a hint of what lies ahead.

This will trigger a collapse in the US current-account deficit. Lacking in saving and wanting to invest and grow, the US must import surplus saving from abroad and run massive external deficits to attract foreign capital. Again, this is not esoteric economic theory – just a simple balance-of-payments accounting identity.

The validity of this linkage was, in fact, confirmed by the recent release of US international transactions statistics for the second quarter of 2020. Reflecting the plunge in domestic saving, the current-account deficit widened to 3.5% of GDP – the worst since the 4.3% deficit in the fourth quarter of 2008 during the global financial crisis.

Like the saving collapse, the current-account dynamic is unfolding in an equally ferocious fashion. Relative to the 2.1%-of-GDP current-account deficit in the first period of 2020, the 1.4-percentage-point widening in the second quarter was the largest quarterly deterioration on record (dating back to 1960).

With the net domestic saving rate likely headed into record depths of between -5% and -10% of national income, I fully expect the current-account deficit to break its previous record of 6.3% of GDP, recorded in the fourth quarter of 2005. Driven by the explosive surge in the federal budget deficit this year and next, the collapse of domestic saving and the current-account implosion should unfold at near-lightning speed.

It is not just rapidly destabilizing saving and current-account imbalances that are putting downward pressure on the dollar. A shift in the Federal Reserve’s policy strategy is a new and important ingredient in the mix. By moving to an approach that now targets average inflation, the Fed is sending an important message: zero-interest rates are likely to persist for longer than previously thought, regardless of any temporary overshoots of the 2% price stability target.

This new bias toward monetary accommodation effectively closes off an important option – upward adjustments to interest rates – that has long tempered currency declines in most economies. By default, that puts even more pressure on the falling dollar as the escape valve from America’s rapidly deteriorating macroeconomic imbalances.

In short, the vise is tightening on a still-overvalued dollar. Domestic saving is now plunging as never before, and the current-account balance is following suit. Don’t expect the Fed, focused more on supporting equity and bond markets than on leaning against inflation, to save the day. The dollar’s decline has only just begun.

Stephen S. Roach is a faculty member at Yale University and the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate, 2020, published here with permission.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Marc Chandler makes excellent commentary that brings into question the analysis presented by Stephen Roach. In any case, New Zealand is likely to have a Labour-Green government that will undermine the support agriculture gives to the economy. If the U.S. dollar does decline, the NZ dollar may sink in tandem.

If the U.S. dollar does decline, the NZ dollar may sink in tandem.

Which means no relative advantage. The ruling elite want a weaker NZD because they think NZ is an 'export nation.'

NZ IS an export nation. Without exports NZ is bankrupt. If you think otherwise I suggest you huddle back under your rock

You may need to dissect further Hook, what sort of export? and which Financiers behind it. Eventually, you'll come to other set of equations which is private debts driven numbers which largely being promoted by band of OZ financiers. Our ever increasing debt is becoming the issue.

By your logic, a Labour-Green government would therefore be good for agriculture as a devalued NZD would make NZ commodities more competitive overseas.

Collapse of USD and USA as a united entity is starting. Is NZ going to keep costing up to China or just ignore the choice it is called to make but avoids for commercial reasons

And just what is that choice? if NZ moves away from China, where does it move towards?




No need to shout


10 bonus social credit points for shouting. Your loyalty has been noted comrade Xing.


Is that a threat, a prediction or both?

xingmowang is either CCP spoke person or editor of Global times. Or may be both.

Interesting to see if China are ready to internalise economy... there is no external world growth and a weak yanky dollar will hurt exports. Last I heard they are still somewhat reliant on American appetite for cheap goods.

Thanks for link. Seemed demand mainly in forty “ containers for home-goods. Not clear if external or internal consumption. Could be spin and also change in labour laws impacting production of containers

May be NZ need to move in omni directions globally?, forge long term relationship which based on productivity/consuming exchanges in nice mutual/reciprocal relationship.

A flight to safety is always on the cards and that will limit the extent of any USD decline.
The RMB may well strengthen but it is more challenging to see the Euro strengthening. And someone big has to appreciate to balance any decline in the USD.
As for the NZD, we are little more than a play thing of the big boys. We will go wherever the herd mentality of the big boys takes us.

It seems quite possible to me that we may not recognise the world in 5 years time. It would appear change is in the wind - geo/politically and from an economic perspective. What we’ve known Bretton-woods to now might become just a found memory for some.

If a war ever broke out would the boomers expect the young to fight to protect the boomers wealth?

It wouldn’t work as they would want to follow the US Fed montetary ponzi, but also sell milk and houses to Chinese. So which side?

You sell what you can sell to whoever pays the most. We should have and could have had an FTA with Russia long ago but buckled to US and EU pressure over Ukraine. Should have told both of them to p1ss off and sort their own issues.

Dance with the devil eh...

What other type of counterparty could we engage - Westpac just got done for participating in actions only a devil could execute if the law is correct.

When interests align we trade. But we are not in a position to be arrogant nor ignorant of possible ramifications.
Australia has made their choice. And seem to be steadfast in alliance with US.
NZ want a bob-each-way and yet it’s only a matter of time before we will be put in a position to choose.

Quite like the idea of Canzuk alliance, free trade type organization. Canada/Australia/NZ/UK

AA in another 30 years most of the boomers will be a memory and their children/grandchildren will be the benefactors. Not long to wait then and maybe you will be one of the beneficaries.

Gen X and Millennials are excitedly jumping up and down at the thought of inheriting a climate-wrecked planet.

Yes. Same as the younger generation have always been expected to protect the older generations freedoms, wealth and general wellbeing. It's been like that since homo sapiens learnt to build communities.

I may add though, worldwide migration is becoming the norm phenomenon. Now, ask any of those young skilled migrants to keep on being kind during this Covid era to protect the general wellbeing/health and wealth of the older folks, which is not theirs and meanwhile there's no sign of kindness back from them. Ponder a bit if you're in their shoes.

Yep. It amazes me how general sentiment isn’t screaming injustice here yet they do on just about any other issue of the day!
Is it ignorance or eternal optimism?

Naturally the young fight wars, as boomers and their parents did, but in reality that's a throwback to 20th century conflicts.
Modern conflict is more likely to take the form of highly technical weapons, fired from a large distance or sea platforms, and likely electronic disruption to enemies systems, even cutting international data cables under the sea or attacking satellites to disrupt communications.
The odds of an actual physical conflict are remote - As Vizzini says "never get involved in a land war in Asia" ;-)

The slide will accelerate when China introduces its digital currency.


In his book Aftermath, the US financial commentator James Rickards is in no doubt that the US$ will continue its decline. Now, he bases that on the Reinhart/Rogoff hypothesis which is based on the seemingly inexorable rise in the Debt/GDP ratio-now over 100%. That has some heavyweight support, but is not universally accepted.
In addition, he contends that there are plans for a Russian/Chinese cryptocurrency based on their gold reserves. I have no idea whether or not there is any truth to that. What is certain is that both countries would wish to see a continuing decline in not just the $, but American influence globally.

I'm confused!
What is true is that Trump campaigned on wanting a lower dollar to make US exports more competitive.
Once in office he continued in this vein, until other events massively overwhelmed this message.
One would think that he would be ecstatic with any decline in the Dollar.

He and others might be happy about winning the race to the (currency) bottom, but the risk for the long-living-beyond-it's-means US is the currency collapse will make it hard to continue borrowing.
And then as a nation it will have to live within it's means, regardless of how much money printing continues.

Then they better vote trump out or he will continue in the vein of his failed businesses of borrowing without regard to paying it back (read bankruptcy) How does that sit with a nation the size of the USA and the worldwide repercussions? Scary.
trump was leading the USA down this path with total disregard of debt way before covid..and now?? And if another 4 years?? Voters in the USA better wake up and quick.

Watch out for the USD short position.

If CNY is falling, that’s dollar shortage for China. And if there’s a dollar shortage for China, then you can (literally) bet Japan’s in the middle. How can you literally bet? Here’s what I wrote in 2016:

The negative yen basis swap acts like leverage where even yields on the interim “investment” are negative. Any speculator or bank with spare “dollars” could lend them in a yen basis swap meaning an exchange into yen. Because you end up with yen you are forced into some really bad investment choices such as slightly negative 5-year government bonds, but that is just part of the cost of keeping risk on your yen side low. Instead, the real money is made in the basis swap itself since it now trades so highly negative. The very fact of that basis swap spread means a huge premium on spare dollars; which is another way of saying there is a “dollar” shortage.

And since that massively profitable negative basis lasted month after month after month (at times for years on end), chronic dollar shortage. Even with so many QE’s.

That’s why you could make a fortune in basis swaps against the yen; Japanese banks had created for themselves an enormous synthetic dollar short position which linked them closely to conditions in China. Link

In tranquil times, the basis is close to zero, as an arbitrageur can exploit the basis and supply dollars in the FX swap market in order to pocket the difference. However, during periods when bank balance sheet capacity is scarce, the basis need not be squeezed to zero. In particular, a large negative basis reflects a
scarcity of dollar funding. In recent weeks, the FX swap basis widened sharply, but then narrowed after the deployment of central bank swap lines, although it remains elevated for some currencies.

This note reviews the recent events in FX swap markets in the context of the longer-term trends in the demand for dollars from institutional investors. We show in particular that the dollar exchange rate takes on the attributes of a risk capacity indicator for the banking sector. This reflects the tendency for an appreciating US dollar to dampen dealer banks’ intermediation capacity. For this reason, the dollar exchange rate and dollar funding costs tend to move in lock-step, as they did during the recent bout of turbulence.

Aggregate data on the use FX swaps and FX forwards can be obtained from the BIS derivatives statistics. The BIS OTC derivatives data (OTC data) show that the total amount outstanding at end-June 2019 neared $86 trillion.. Link

US banks, as I showed a few months ago using TIC, through their foreign subsidiaries bid up nearly all of the outstanding swaps and then those foreign subs transferred the “dollars” from foreign locations back onshore to their American parents (or, foreign parents bidding for dollar swaps at their local central bank, and then transferred the proceeds to their American subs operating here in the US; for accounting purposes in data like TIC, there’s no distinction since both forms are treated the same way). Link

Now think about exactly what the TIC data is showing you here; especially given the above is what I call the red series referring to US banks who are borrowing from foreign counterparties. All of a sudden, beginning with March 2020 (for obvious GFC-like reasons) US banks began to hurriedly borrow a boatload of T-bills from unknown foreign counterparties classified as “other” kinds of financial institutions in just the same way they had eleven and a half years before.

They also borrowed substantially from Foreign Official Institutions (FOI’s), meaning central banks.

More importantly, for our purposes in August 2020 trying to explain why the dollar outside of the euro won’t go down, they have continued borrowing T-bills from these foreign sources all the way through to the end of June (the latest month of data)!

Does that sound like Jay Powell’s been effective at, well, anything of true monetary substance? Bank reserves, dollar swaps, and the always-dependable glowing press reports are absolutely no substitute for an expanding and functioning collateral stream; a lesson that should’ve been learned the first time we did this.Link

Welcome to what was my world 22 years and more ago. QE is piffle.
The bloke writing this article has probably never typed "mine" or "yours" into a Reuters dealing system in his life.

I listened to two videos yesterday

this is Jeff Snider and Brent Johnston

This is Lacy Hunt on Macro voices, I hate podcasts wish I could just read it.

Interesting see what people think of them, ie Govt debt being a drag on future growth etc.

Has any of you gentlemen considered that our honorable Xingmowang might not be Chinese at all, but a bot to stir xenophobia in NZ? I'm not Asian origin, but I do travel all over the globe with my job, including Asia and I wish many people would have more insight into foreign cultures, their world-class education system (i.e. China, Chile) and their ways to establish long-term business relationships based on honor and trust and not looking for the quick buck only.
A good read is Ray Dalio, a famous US investor who tries to but A & B together of this modern world - read Chapter 7 of his experiences, high and low circles in China, over the last 35 years to make you see both sides of the coin.