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Just Look At The Debt Rising

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I know it was published yesterday but the bits on US household debt dont half make scary reading.... the proportion of income going to meet debt repayments... surely this can't continue...

Martin Wolf: We should still worry about imbalances

By Martin Wolf

Published: March 28 2006 20:12 | Last updated: March 28 2006 20:12


Third, strange things are happening to the US economy. When the foreign sector is running a huge financial surplus, the domestic sectors must, in aggregate, run huge deficits (excesses of expenditure over income). Since the bursting of the equity bubble, the corporate sector has moved into surplus. The government and, above all the household sector, are in huge deficit. In 1982, the household sector ran a surplus of 5.5 per cent of GDP. Now it runs an unprecedented deficit of close to 7 per cent of GDP. As a result, household indebtedness and debt service are both soaring...


Finally, the counterpart of the huge capital inflow is not increased investment, but increased consumption and falling national savings. Gross savings are about 14 per cent of GDP and net savings just 1 per cent. Investment is also tilted towards real estate and the non-traded sector, which will not pay the foreign debts.

Last but not least, the finance of the inflow has increasingly taken the form of short-term lending, including large-scale official lending.

Yes, there are economists who argue that the huge US current account deficits are a mirage or, if not that, indefinitely sustainable. Professor Willem Buiter of the London School of Economics, dealt with the former argument in the FT’s economists’ forum.*** The latter is, I believe, mistaken unless one assumes almost limitless generosity on the part of the capital exporters.

Over the past 15 years, US imports at constant prices grew at a trend rate of 8.3 per cent a year, while exports grew at 5.1 per cent. Today, as a result, imports are 60 per cent bigger than exports. It would take a substantial turnround in these relative rates of growth for the current account deficit merely to stabilise as a share of GDP, let alone fall. Yet, if these trends were to continue, the current account deficit and net liability position would, even with no increase in the cost of funds to the US, reach 17 per cent and 100 per cent of GDP, respectively, by 2016.

What is undesirable ought to change. What is unsustainable will change. What is dangerous must change. Yet, if the world is to avoid a serious recession, adjustment must start in the surplus countries. The fate of the world economy does not lie predominantly in US hands. It is comforting for many – both American and non-American – to disbelieve this. It is true, all the same.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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