There is substantial interest in the incoming administration’s policies and their possible effects on the nation’s economic prospects. US financial assets have reacted positively – higher stocks, higher yields and a higher dollar. But there are a few internal contradictions that one should take note off as these might lead to frictions and imbalances.
This post will try to cast a light upon some of the international aspects of the issue.
The US Current Account has behaved in a rather restrained manner even in light of substantial recent dollar appreciation. There might be lagged effects here but the CA has yet to reflect the ongoing currency adjustment as happened on previous occasions. The trends with regard to the Net International Investment Position are more notable though. To simplify, NIIP is the aggregation of historic CA balances and here the picture is somewhat more somber. US net liabilities versus the rest of the world were end of Q2-2016 some 44% of GDP. Looking forward, a strong dollar will further pressure US trade position; it will lower earnings on US owned foreign assets while higher domestic yields will raise what the nation pays to residents abroad. Unless addressed, the imbalances widely talked about before 2008 are likely to make a comeback as one moves into the next presidency.
Alternatively, countermeasures seen in modern history would possibly be: making a deal for a weaker dollar (similar to a Plaza accord), Federal Reserve capping domestic yields (as done in early 1940s) and convincing international creditor country policymakers (Euro area, Japan, Switzerland, etc.) to abstain from pegging their policy rates at negative numbers and/or from adding to their dollar reserves. The probability of these steps coming into effect should be higher than in previous political cycles as above issues were part of the campaigning and as there is today significantly more attention apportioned to US manufacturing, trade and international deficits.
The first chart below plots the CA against the dollar, while the second plots CA against the NIIP. Rest of the charts detail balances on Direct Investment, Portfolio Investment and Other Investment positions of US vis-à-vis rest of the world.