Government deficits have skyrocketed in the past year, yet the U.S. as a whole is borrowing much less from the rest of the world. What’s going on?
As shown in the following chart, the answer is simple: Americans are saving more and investing less.
The chart shows how our current account deficit — the amount that we have to borrow from abroad — changed from the first quarter of 2008 to the first quarter of 2009. One would usually expect that soaring government deficits — which have increased more than $540 billion at an annual rate — would translate into more borrowing from abroad. Indeed, if other factors had stayed the same, U.S. borrowing from abroad would have needed to increase from $693 billion in Q1:2008 to $1,236 billion in Q1:2009.
But other factors didn’t stay the same. Individual Americans started saving again, reducing our nation’s borrowing needs by $455 billion at an annual rate. And private investment plummeted, reducing borrowing needs by another $458 billion. Together, those two changes largely explain how U.S. borrowing from the rest of the world could fall by $400 billion over the past year, despite booming government deficits.
In the long run, the increase in personal saving will be a welcome development, as Americans rebuild their wealth and help finance government deficits (in the short run lower consumer spending may weaken the recovery). The decline in private investment is more troubling. In the short run, some of that decline is healthy as we work through excess inventories of products, houses, and some types of commercial real estate. In the long run, however, we will need growing investment to boost the nation’s productive capacity.
Notes on the data: All figures are reported as seasonally-adjusted annual rates (SAAR). The chart uses the National Income and Product Account (NIPA) measure of government deficits, including government investment expenditures. The “Other” category includes consumption of fixed capital” (i.e., depreciation) and the statistical discrepancy (i.e., the placeholder that makes everything balance). BEA will release official data on international transactions in mid-June; the figures on the current account deficit here come from the recent GDP release.
4 thoughts on “Why is the U.S. Borrowing Less?”
My only mild quibble with the discussion is its one-sided nature – solely the demand for foreign capital. Surely the supply of foreign capital has shrunk on its own, which has likely led to some of the observed decrease in demand (increased private saving and decreased investment). Yet the discussion reads as if there’s an unbounded supply of capital at current rates and Americans are calling all the shots.
@D. Watson. Good point. The primary message of my post is pure accounting: Q. How can the government borrow more, yet the country borrow less? A. Americans save more and invest less. As you note, the underlying drivers of this could, in principle be any combination of demand-side or supply-side factors. It might be that foreign capital dried up, for example, so increased government borrowing is, in essence, crowding out private consumption and investment. My guess is that demand-side factors predominant over the period in question — with Americans consciously choosing to save more and invest less because of what they see in the domestic economy — but supply-side factors were undoubtedly at work as well. Thanks.
I agree that you have to look at both sides of the equation. We are borrowing less because we are importing less. We are importing less because we are borrowing less…
This piece was a lifjeacket that saved me from drowning.
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