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Stephen Roach argues that further pressure on the US net savings rate will force a rapid and sharp devaluation of the American currency

Stephen Roach argues that further pressure on the US net savings rate will force a rapid and sharp devaluation of the American currency

Pandemic time runs at warp speed. That’s true of the COVID-19 infection rate, as well as the unprecedented scientific efforts under way to find a vaccine. It is also true of transformational developments currently playing out in pandemic-affected economies. Just as a lockdown-induced recession brought global economic activity to a virtual standstill in a mere two months, hopes for a V-shaped recovery are premised on an equally quick reopening of shuttered economies.

It may not be so simple. A sudden stop – long associated with capital flight out of emerging markets – often exposes deep-rooted structural problems that can impair economic recovery. It can also spark abrupt asset-price movements in response to the unmasking of long-simmering imbalances.

Such is the case for the pandemic-stricken US economy. The aggressive fiscal response to the COVID-19 shock is not without major consequences. Contrary to the widespread belief that budget deficits don’t matter because near-zero interest rates temper any increases in debt-servicing costs, in the end there is no “magic money” or free lunch. Domestic saving, already depressed, is headed deep into negative territory. This is likely to lead to a record current-account deficit and an outsized plunge in the value of the dollar.

No country can afford to squander its saving potential – ultimately, the seed-corn of long-term economic growth. That’s true even of the United States, where the laws of economics have often been ignored under the guise of “American exceptionalism.”

Alas, nothing is forever. The COVID-19 crisis is an especially tough blow for a country that has long been operating on a razor-thin margin of subpar saving.

Heading into the pandemic, America’s net domestic saving rate – the combined depreciation-adjusted saving of households, businesses, and the government sector – stood at just 1.4% of national income, falling back to the post-crisis low of late 2011. No need to worry, goes the conventional excuse – America never saves.

Think again. The net national saving rate averaged 7% over the 45-year period from 1960 to 2005. And during the 1960s, long recognized as the strongest period of productivity-led US economic growth in the post-World War II era, the net saving rate actually averaged 11.5%.

Expressing these calculations in net terms is no trivial adjustment. Although gross domestic saving in the first quarter of 2020, at 17.8% of national income, was also well below its 45-year norm of 21% from 1960 to 2005, the shortfall was not as severe as that captured by the net measure. That reflects another worrisome development: America’s rapidly aging and increasingly obsolete stock of productive capital.

That’s where the current account and the dollar come into play. Lacking in saving and wanting to invest and grow, the US typically borrows surplus saving from abroad, and runs chronic current-account deficits in order to attract the foreign capital. Thanks to the US dollar’s “exorbitant privilege” as the world’s dominant reserve currency, this borrowing is normally funded on extremely attractive terms, largely absent any interest-rate or exchange-rate concessions that might otherwise be needed to compensate foreign investors for risk.

That was then. In COVID time, there is no conventional wisdom.

The US Congress has moved with uncharacteristic speed to provide relief amid a record-setting economic free-fall. The Congressional Budget Office expects unprecedented federal budget deficits averaging 14% of GDP over 2020-21. And, notwithstanding contentious political debate, additional fiscal measures are quite likely. As a result, the net domestic saving rate should be pushed deep into negative territory. This has happened only once before: during and immediately after the 2008-09 global financial crisis, when net national saving averaged -1.8% of national income from the second quarter of 2008 to the second quarter of 2010, while federal budget deficits averaged 10% of GDP.

In the COVID-19 era, the net national saving rate could well plunge as low as -5% to -10% over the next 2-3 years. That means today’s saving-short US economy could well be headed for a significant partial liquidation of net saving.


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With unprecedented pressure on domestic saving likely to magnify America’s need for surplus foreign capital, the current-account deficit should widen sharply. Since 1982, this broad measure of the external balance has recorded deficits averaging 2.7% of GDP; looking ahead, the previous record deficit of 6.3% of GDP in the fourth quarter of 2005 could be eclipsed. This raises one of the biggest questions of all: Will foreign investors demand concessions to provide the massive increment of foreign capital that America’s saving-short economy is about to require?

The answer depends critically on whether the US deserves to retain its exorbitant privilege. That is not a new debate. What is new is the COVID time warp: the verdict may be rendered sooner rather than later.

America is leading the charge into protectionism, deglobalization, and decoupling. Its share of world foreign-exchange reserves has fallen from a little over 70% in 2000 to a little less than 60% today. Its COVID-19 containment has been an abysmal failure. And its history of systemic racism and police violence has sparked a transformative wave of civil unrest. Against this background, especially when compared with other major economies, it seems reasonable to conclude that hyperextended saving and current-account imbalances will finally have actionable consequences for the dollar and/or US interest rates.

To the extent that the inflation response lags, and the Federal Reserve maintains its extraordinarily accommodative monetary-policy stance, the bulk of the concession should occur through the currency rather than interest rates. Hence, I foresee a 35% drop in the broad dollar index over the next 2-3 years.

Shocking as that sounds, such a seemingly outsize drop in the dollar is not without historical precedent. The dollar’s real effective exchange rate fell by 33% between 1970 and 1978, by 33% from 1985 to 1988, and by 28% over the 2002-11 interval. COVID-19 may have spread from China, but the COVID currency shock looks like it will be made in America.


Stephen S. Roach is a faculty member at Yale University and the author of Unbalanced: The Codependency of America and China. Weijian Shan, CEO of PAG, is the author of Out of the Gobi and the forthcoming Money Games. Copyright: Project Syndicate, 2020, published here with permission.

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26 Comments

It seems to me the unprecedented foray in dollar amounts the US Treasury is injecting into private company bonds and ETFs that they have severely compromised the free capital markets as we know them? There has always been manipulation but the immensity of this market interference is such a huge artificial prop up that to me just screams...GET OUT WHILE YOU CAN!!!
On places like yahoo finance etc etc, you see the same lame articles about why the market is where it is right now eg Nasdaq at all time high...seriously?? If people think that's where the markets should be then I must be on another planet. (disclosure..I am 95% out of the US stock market and was considering 100% today as the markets went up again!! Just keeping my toe in in case I want to get back in when the shite hits the fan) The economic fallout is, and is going to be, catastrophic..especially as Covid is just starting to ramp up again in the US for the long haul. The markets simply are not taking this into account. Wait till June figures come out and the idiots writing the articles will be going ..OMG..I didnt see this coming!!!! Really?
Re article..Yep..NZ dollar up to maybe 80c within 6 months on such a cluster playing out under the orange faced clown. I drool.
Good luck to all.

PM’s and Crypto’s is the only option to get out of ‘the system’ that enables individual sovereignty that’s free of Central bank intervention and manipulation.

Indeed. And more folks holding Bitcoin than short trading suggests many are interested in the longer term outlook. https://www.theblockcrypto.com/linked/68902/less-than-20-of-the-current-...

The market can stay liquid for longer than you can stay rational.

Why do the Stephen Roaches of this world persist in hammering away at the imminent devaluation of the US currency? It is certainly not because the facts fit their argument. There is a world wide shortage of US currency. The net domestic saving rate is the same as 2011. Did the US$ devalue then? No. As Martin Armstrong says, one thing and one thing only will cause the US$ to devalue. That is when people who buy such things lose confidence in it, and refuse to pay a higher price for US$ than they can get away with. Only when currency traders refuse to pay the current price for US$ will it go down. Next problem is relative to which currencies.. If US$ goes down, a lot of other currencies also will plummet, for the same obvious reason, leaving their relative values the same! Only the countries with sane, sensible monetary policy will have strong currencies, meaning their exports will leap up in price compared to the low currency countries. This causes all sorts of other issues. Great fun.

Actually, I think Roache's idea is more contrarian than the one that you put forward. Most people are expecting demand for USD because of the global 'need' for it. Mind you, you talk about people losing confidence in the dollar. That loss of confidence is growing rapidly, even if it's not immediately obvious.

And to see a lame-brained attempt at discouraging confidence in the US$, one need look no further than the emergence of the petro-Yuan. Even the Chinese had so little confidence in their own plan they had to guarantee it with gold conversion. Duh! So who's selling oil & gas to China and getting paid in Yuan? Nobody! Even the Iranians and Russians want cold hard US$ from them. Summary: US$ still rules the roost!

Times change. Sterling was still big when I was born. The Maria Theresa thaler was still being minted and used in 1935 but she died in 1780. Money is trust?
If the US economy bounces back all is well but if not? It is getting difficult to trust the USA economically.

Wouldn't mind one of those thalers.

The timer for the USD is nearly up...tick tock.. the money printers go brrrrrrrrrrr. I expect it will happen in the next 12 - 18 months.

Infections ticking up by one third in the last couple of weeks, rent / eviction / loan holidays expire at the end of the month. Dead man walking.

I'm not so sure. When you look around at all the other possible reserve currencies (Euro, JPY, even the RMB) you see that they are printing money as fast as (if not faster than) the US. Their currencies are being debased just as much. I don't have the answer, and I'm not hearing any coherent solution from any incredible source (Bitcoin? Yeah, right!), so I'm more inclined to think the status quo will prevail for a while yet.

A government deficit equals a private sector surplus, only government can provide net financial assets to households to fund their savings. Some further explanation here.
https://gimms.org.uk/fact-sheets/sectoral-balances/

I would agree with you, if only it worked for stocks where much of the money saved is going.

Prices for stock is set on the margin, so money invested can inflate or evaporate on the confidence of investors, rather than company performance measures.

While some borrow to invest, I think you'll find the majority of stock trades are in cash.

Central banks have been pushing to increase spending to stimulate and grow the economy. For savings to be encouraged again interest rates would have to be less artificially low. Somehow I don't think that will be politically expedient. (Reserve bank is allegedly independent though)

How does covid effect greenback notes? Greenbacks have not been issued since 1865..

USDs are still green. It still works as a colloquial term though not 100% technically accurate.

The US is a business and that business is in its death throws. We all know it's coming but don't know when.
It's like watching the liquidator going to work letting their mates jump with minimal loss.

The world of global finance is changing fast. The status quo control the MSM narrative, yet social media has a strong footing.
Since 2000 to 2020, the usd has gone from 70% of global reserve currency, to 60%. And it's continually dropping. The usa has trade deficits with its trading partners, not surpluses. This means reduced need for usd. The problem with being the most widely used is being exposed to the largest downturn, which will happen exponentially. What many have forgotten is that Nixon removed the usd from the gold standard TEMPORARILY. (In 1971) This was in direct response to trade deficits. They've had the world living in Disneyland eversince, supported by a privately owned central bank (the federal reserve), with foreign policy run by the military industrial complex. 50 years is about max for a fiat. This has massive implications for fiat currencies that are solely reliant on the usd as a backing. Like the nzd, the rbnz, has not a single ounce of gold in it's reserves. These things deserve serious consideration by those interested in protecting their wealth.

Ask the good people in Africa and South America if they are losing confidence in the US$. A resounding no. Especially compared to their own currencies.

Ask the good people in African countries that are now part of the belt and road initiative about the future. The digital yuan has completed it's back end testing.
The usd is being destroyed from within the usa, and its diminishing buying power is self evident. The fed completely abused its position as guardians of the global reserve, and now they are stuck in a trap of their own making, no other country is responsible for what they themselves have done. There are plenty that still believe in the fed, and feel confident that the "fed's got their back". Fair enough. There are a growing number of people that are looking at global finances, and seeing that something isn't quite right, and they should be encouraged to carry on questioning and researching.
When bankrupt companies shares are hitting all time highs (like hertz) and a judge says it's ok for them to sell more shares, the illusion starts to be questionable. When the fed fund BlackRock $750 bln to buy etfs on the feds behalf, including BlackRocks own bonds, and Jerome Powell owns shares in them, then people start to look even closer. The disintegration of the usa has very little to do with opposition, and more to to with it's wilful mismanagement by the global elite that have made massive profits. This is neither for or against, yet an inquiring mind will look seriously at such events, and carry on searching. The belt road has over 100 member countries, underlining how much, and how fast things are changing.

Just like they abused their self appointed 'world police' roll. Starting wars, destabilizing countries and all the rest to sell arms and control oil. Sure China isn't great but the US have been a pack of rabid dogs.

What an interesting echo chamber you must listen to. “US have been a pack of rabid dogs.”
How‘d those 18 year old soldiers, in US towns, sitting on humvees and shooting US citizens during their lockdown go? Oh wait... that never happened. Kinda like the marauding gangs and zombies all around NZ during our lockdown... didn’t happen either. Is there anything you aren’t an expert Kezza R?

Wow Kezza ......... you are wrong on so many levels .

Firstly , its "ROLE" not roll , thats something you do in the hay .

Secondly , Afghanistan could have avoided war by handing over Osama in the Bin , the man responsible for 9/11

Thirdly , its Chinese and Russian weapons that have turned up in wars all over the place , such as the AK47 ............the biggest arms dealers are Russia and China by a country mile .............. missiles , 20mm ack-acks, T54 to T70 tanks , not to mention those hopeless Migs and those dreadful choppers .

Over 150 countries have bough Russian military aircraft , and only a handful countries have bought US planes that have been supplied outside the NATO or ANZAC alliances

OK this is how the US macroeconomy works. The government pretty much always runs a deficit (G-T) that accommodates the private domestic sector to net save (S-I) and the foreign sector to net save in US dollars (X-M). In return, the US gets boat loads of extra real stuff from offshore and the foreigners get US dollars they like to save in.

2017 - in % GDP
(G-T) = (S-I)-(X-M)
3.5 = 1.2 +2.3
https://en.wikipedia.org/wiki/Sectoral_balances

And yet no government default, no currency crisis etc. This is the normal case for the US.

Savings and Investment equate. But not because households decision to save more of their income encourages investment (it might cause inventories to build up though as things go unsold). No the decision to invest creates new income which is then saved. We are in a monetary economy. Not one based on bushells of corn. Spending comes before saving.

So we could end up back with the KIWI$ worth as much as 88 US CENTS ?

Days to the General Election: 24
See Party Policies here. Party Lists here.