Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. = # Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America Authors: Discussant: None Video: https://players.brightcove.net/1543588752001/default_default/index.html?videoId=6026436135001&t=0s ## Talk (00:00:00 – 00:50:09) [00:00:01] Good evening. Welcome to the Federal Reserve Bank of St. Louis and tonight's dialogue with the Fed. [00:00:08] My name is Chris Neely. I'm a vice president and economist here at the Bank and I'd like to welcome you. [00:00:15] We especially like first-timers. [00:00:17] So if you're a first-timer, our public affairs people want me to ask you to raise your hand. [00:00:23] So raise your hand if you've never been here before. [00:00:25] But if there's anyone we like better than first-timers, it's people who have been here before. [00:00:29] So, [00:00:32] especially welcome to those people who are coming back. Now before we get started, just [00:00:38] one or two things. You've got both an agenda and evaluation form in front of you. We take [00:00:46] the idea of having you get an informative and enjoyable evening very seriously. [00:00:51] So we very much want your feedback. [00:00:54] So at the end of the evening, not right now because you don't know whether you like it or not yet, [00:01:00] although I can help you with that. [00:01:03] Not right now, but fill out one of those feedback forms if you would like. [00:01:08] By the way, I'm a bit of a hypocrite on this because I get quite annoyed when people spam me with surveys all the time. [00:01:14] But nevertheless, I'm gonna ask you to fill it out. All right. [00:01:18] So we also have provided you with a copy of one of our St. Louis publications called Page One Economics and [00:01:25] the particular one that we have addresses some of the issues that Paulina will be talking to you later tonight. [00:01:33] Now the dialogue with the Fed has been going on for a number of years and [00:01:37] we've covered a lot of ground in that time. So in the past, we've talked about monetary policy, [00:01:44] financial decisions of households, the history of the Federal Reserve, [00:01:49] Bitcoin, the global economy, and a year or two ago, I did a [00:01:55] presentation on the Chinese economy and the Chinese currency. [00:01:59] Now [00:02:01] tonight, however, we're going to talk about capital flows, which is trade and financial assets as opposed to trade in goods and services. [00:02:10] So [00:02:12] you often hear about trade in goods and services in the news, but trade and financial assets is equally important and [00:02:21] a little bit more mysterious. So hopefully Paulina will help clear up some of the mysteries tonight. [00:02:28] Let me [00:02:29] tell you [00:02:31] after I conclude my introductory remarks in a minute or two, I'm going to turn it over to [00:02:37] Paulina Restrepo Echeveria [00:02:39] and she's going to talk to you about capital flows for about 50 minutes. And then Paulina [00:02:47] Paulina and Fernando Martín [00:02:50] also an economist at the bank. [00:02:52] The three of us will have a panel discussion where we'll take questions and answers or take questions and hopefully give answers. [00:03:01] Now I'd like to introduce you to our speaker for tonight. [00:03:06] And for this I'm going to read because I want to get the description correct. [00:03:10] All right. So Paulina Restrepo Echeveria is a senior economist at the St. Louis Fed. [00:03:16] Her research interests are in the field of international macroeconomics and matching. [00:03:21] She has done work on the direction of capital flows, debt crises, sovereign defaults in commodity-rich economies, [00:03:29] the incidence of the informal sector in the macroeconomy, [00:03:34] labor market frictions and theoretical models of the marriage market. [00:03:39] Her work has been published in the very prestigious American Economic Review and [00:03:44] the European Economic Review among others. I added the American, I've added the very prestigious part, [00:03:50] just so you guys would know, she didn't say that about herself. [00:03:56] She received the Rodrigo Gomez Central Bank Award in 2005 for her work on inflation targeting. [00:04:03] Restrepo, before coming to the bank, Restrepo Echeveria was an assistant professor of economics at the Ohio State University [00:04:11] and worked as a researcher at Banco de la República de Colombia. [00:04:16] She now teaches international economics to graduate students at Washington University, [00:04:22] Adjunct, and is a member of the editorial board of the Journal of Development Economics. [00:04:28] She received her PhD in economics from UCLA in 2010 and now it's time to turn it over to Paulina. [00:04:45] So thank you Chris very much for those kind words. [00:04:50] So today we're going to be talking about capital flows and when we think about capital flows, [00:04:56] we can divide them between capital inflows and capital outflows. [00:05:02] So capital inflows reflect everything that comes into the country from the rest of the world [00:05:08] and capital outflows reflect everything that goes out of a country into the rest of the world. [00:05:14] So having said that, today we're going to look at the formal definition of capital flows. [00:05:22] What are they? How are they measured formally by a country? [00:05:28] And we're going to take a look at how capital flows have evolved over time in the United States. [00:05:35] When we look at how capital flows have evolved over time here in the U.S. [00:05:41] and the formal definition, we're going to talk about the link between capital flows and debt [00:05:48] and how capital flows can tell us something about whether a country is a net debtor or a net lender. [00:05:57] And then given that we're going to take a look at whether a country is a net debtor or a net lender, [00:06:04] we're going to dive into the question of is being a net debtor sustainable? [00:06:11] Is this an issue or isn't it not an issue for a country? [00:06:16] And finally, I'm going to talk a little bit about what is the relationship between public [00:06:23] debt and fiscal deficits because we're going to see that given that the [00:06:28] capital flows are going to tell us something about whether a country is a debtor or a net lender, [00:06:37] we are going to link this subject to whether a country is running a fiscal deficit or a fiscal [00:06:44] surplus and how are the two things related? So that's the plan for tonight. [00:06:52] So let's start with the definition of capital flows. And the main way to think about capital flows [00:07:00] is by looking at the balance of payments and we're going to look at the different components [00:07:06] of the balance of payments. So the balance of payments is basically everything that leaves the [00:07:11] country minus everything that comes into the country as I mentioned before. So [00:07:19] how does a country measure all of these resources that are leaving and coming in? [00:07:27] So in the U.S., all international transactions are recorded by the Bureau of Economic Analysis [00:07:33] or BEA and all those transactions are recorded in the balance of payments. So think about [00:07:43] so think about basically anything that you are exchanged with the rest of the world, call it good, [00:07:52] service or financial asset. So the balance of payments has three main components. It has the [00:08:02] financial account which is just the change in international ownership of assets. It has [00:08:08] the capital account which is any other financial transaction and it has the current account. And [00:08:15] tonight we're going to focus on the current account, its components, how it's measured, [00:08:20] how it's looked over the years because actually the current account is the principal component [00:08:26] of the balance of payments. So when you think about an economy, you think about everything [00:08:32] that is going on domestically. So take output, so GDP, anything that is produced inside a country [00:08:41] within a year and we know that that which is produced in a country within a year has to be [00:08:48] equal to what the country consumes as a whole plus whatever is invested plus what the government [00:08:56] spends plus the balance of payments. So the balance of payments is everything that has to do [00:09:03] with the rest of the world in our national accounts. So having said that, let's move on and dive into [00:09:11] what is the current account which is as I said the principal component of the balance of payments. [00:09:22] So the current account is comprised of three different components. It's comprised of the trade [00:09:31] balance, secondly the income balance and finally the net unilateral transfers. So let's start by [00:09:40] looking at the last two components and then we're going to focus on the trade balance. But [00:09:45] let's start with income balance. What is income balance in the current account? So income balance [00:09:51] is everything that is paid for in exchange of capital and labor and is measured separately [00:10:00] for capital and labor. So when we look at income balance for capital, income balance for capital [00:10:06] is everything that we pay out as dividends or investments for example or profits to the rest [00:10:15] of the world and what they give us. So the net of those payments to capital. Then we have income [00:10:26] balance on labor and the income balance on labor is everything that we pay out for workers that [00:10:34] are non-US citizens working here in the US and what is paid out to US citizens in the rest of the world. [00:10:46] So earnings to US citizens in the rest of the world minus earnings to non-US citizens inside [00:10:54] the US is what determines the labor income balance. So the sum of the labor and the capital [00:11:04] income balance comprises that second term that we see up there. Then the third one which is the [00:11:12] net unilateral transfers is basically gifts. So it's both public and private gifts. So let me [00:11:21] give you an example. In terms of private gifts, the most important piece is remittances. So think [00:11:29] for example about a worker who has family abroad, it could be anywhere in the world, take Mexico [00:11:36] for example, they work in the US and every month after they get paid they send part of their [00:11:43] salary or their earnings to their family back in Mexico. This is going to be a remittance, [00:11:50] it's part of the net unilateral transfers that is coming from the private side and this is going to [00:11:56] count as a negative flow out of the current account on this term. Then vice versa would also apply in [00:12:07] the sense that if we have anyone who is receiving resources from their families for example [00:12:14] in another country while they're living here. So for example, take for example a US citizen [00:12:22] who is studying here in the US but their family lives abroad and their parents [00:12:26] sends them money every month in order to pay for their schooling costs for example. That is also [00:12:34] counted, that's going to be counted as a positive in that account on the private side. [00:12:41] Then we have government gifts in some, if you want to call it like that in a simple way. So [00:12:50] government gifts are all transfers made and received by the government. In the case of the US, the US [00:12:58] is mainly a giver because basically the US is helping other countries sort out their problems [00:13:07] and for example help with corruption or with wars in Latin America, [00:13:15] what needs to be respected to the guerrillas and things like that. So the US supports different [00:13:21] plans to help out other countries get out of their political issues and all of these are just [00:13:26] gifts that are accounted in the net unilateral transfers and because the US is a net giver, [00:13:32] this is all going to come in as a negative term on this part of the account. So those two [00:13:41] terms there are important but they don't account for the main part of the current account. It turns [00:13:48] out that what accounts for the main part of the current account is the trade balance and [00:13:52] what is the trade balance? The trade balance is the sum of the goods balance plus the service [00:13:59] balance and what I mean by the goods balance is net exports of goods and the service balance is [00:14:07] net exports of services. So when we look at net exports of goods, we mean the net of all the [00:14:18] goods that are exported and the goods that are imported. So all goods exports minus all goods [00:14:25] imports that's going to be the goods balance and then in terms of services is just the same [00:14:32] but it's with services. So all of those services that are provided abroad minus all those services [00:14:39] that are provided by other countries here within the US. So why is the current account important? [00:14:49] It's going to be very important because it's going to tell us if a country is a net debtor [00:14:55] or a net lender. Why does it tell us that? So imagine the following. Remember that I told you [00:15:02] that when we think about the national accounts of a country, we think about the fact that [00:15:07] everything that is produced within a year in that country has to be equal to consumption [00:15:13] plus investment plus government spending plus the balance of payments. And if that balance of [00:15:21] payments is negative, it means that a country is receiving many more resources than what they are [00:15:29] sending abroad. In other words, they're going to be able to consume and invest more than what [00:15:37] they are producing in that given year. And how do you consume or invest more than what you are [00:15:45] producing in a given year? You acquire debt. So you're getting debt with someone, someone lends [00:15:52] your resources and that allows you to consume more or invest more than what you are producing [00:15:58] yourself or earning by yourself. So then it turns out that if we have a negative current [00:16:05] account, this means that a country is a net debtor. And if we have a positive current account, [00:16:11] this means that a country is a net lender. So this is going to provide us a lot of information [00:16:18] in this regard. So something that is important is and that I think is worth mentioning is [00:16:28] our ability to measure these objects that we have here. So I'm going to show you how the current [00:16:35] account looks like in the U.S. And then I'm going to also show you how the trade balance looks. [00:16:43] And we're going to look at what are the differences and what are the issues with [00:16:47] measuring one versus the other? Because we do have some advantages in measuring [00:16:53] the trade balance versus measuring the current account. So you can imagine, I guess, that if I [00:16:59] tell you that we do pretty well at measuring the trade balance, but we don't do so well at measuring [00:17:06] the national, the current account, then what you can deduct from that is that the two [00:17:14] components at the very end, so the income balance and the net unilateral transfers, [00:17:19] are the two pieces of the current account that are not really well measured. [00:17:24] So I'll come back to this point in just a moment. So let's take a look at the current account [00:17:33] and how it looks like. So here we have a plot of the U.S. current account since 1960 [00:17:40] and it's plotted as a percentage of GDP. What does it mean? It's a percentage of everything [00:17:48] that is produced in the U.S. in a particular year. So that gives you a better sense of how big [00:17:55] or how small this object is within the national accounts because again, I've told you that on the, [00:18:03] on one side we have GDP or everything that we produce and then on the other side, [00:18:09] or those resources are used for consumption, investment, government spending, and the [00:18:16] balance of payments which is mainly comprised of the current account which we are looking at here. [00:18:21] So the size of the current account is a percentage of GDP is very telling in terms of the size that it [00:18:26] has. So the point that I want to make with this plot is that between 1960 and 1980, the current [00:18:37] account was roughly in balance, meaning that there weren't long periods of time in which it [00:18:45] was positive or negative. It was kind of close to zero. You can see that it was kind of consistently [00:18:50] positive for the first eight years but only at around 1% of GDP. That's not very large. [00:18:57] However, once we reach 1980, we see that it starts turning positive and it starts running [00:19:05] negative, sorry. And it starts running negative numbers that are, I mean, much larger that at [00:19:12] least the surplus that we were having at the beginning of the period. So for a moment, take a [00:19:19] look at 1985. In 1985, we know that the current account was in a deficit of around 3%. And then [00:19:27] at around 2005, 2006, we see a deficit of around 6.3% of GDP, more or less. So in the past, [00:19:39] 20, 30 years, we've been running current account deficits. And right now, when we look at it, [00:19:49] it's around 2% to 3% of GDP, the deficit. So this means that the US is owing the rest of the [00:19:59] world in this amount. Now, let's take a look at the trade balance. So the trade balance, [00:20:12] as we said, has different components. So let's go component by component. So first focus on the [00:20:21] red line there. The red line is net exports of goods. So it's all the goods that the US exports [00:20:29] minus all the goods that the US imports. The net of that is self-explanatory net exports of goods. [00:20:38] What we see is that it behaves very similarly to the current account. No surprise. I've told you [00:20:44] that the biggest component of the current account is the trade balance. However, when we look at [00:20:50] net exports of services, they look pretty different. And we see that instead of there being a deficit [00:20:57] in terms of net exports of services, there's a surplus, meaning that when you look at the green [00:21:03] line over there, net exports of services are positive starting in 1990. They were close to zero [00:21:12] before then. And then they turn positive. Then no surprise, the blue line is a little bit above [00:21:20] the red one because we've seen that the net exports of goods and services, so the overall [00:21:26] trade balance, which is the blue line in the plot, is the sum of the red line and the green line. [00:21:34] So here I want to mention something that is pretty interesting. It should come as no surprise that [00:21:42] the net exports of services are positive while the net exports of goods are negative. [00:21:49] This is something that in my view is to be expected of an economy like the US. Why so? [00:21:55] When an economy is very young, the economy starts being intensive in agricultural goods. [00:22:02] As time passes by and the economy evolves and develops, economies transition from what we call [00:22:09] the first stage of their structural transformation, which is when they devote most of their resources [00:22:15] to producing agricultural goods, to the second stage of a structural transformation, which means [00:22:20] that they start switching agricultural goods for manufacturing goods. And then as a third stage, [00:22:28] economies transition from producing manufacturing goods to services. The US is a very developed [00:22:36] economy that is already undergoing the third stage of their structural transformation, and as [00:22:42] such it's an economy that is intensive in services. So it should not come as a surprise that what [00:22:48] we need to import is goods because usually it's manufacturing goods because now we're in an [00:22:56] economy that is more devoted to services and given that we're more devoted to services, [00:23:02] that's what we have to offer to the rest of the world. And hence that's what we are exporting. [00:23:08] So it shouldn't come as a surprise that the US is importing goods and exporting services. [00:23:16] Okay, so let me go back to where we were. And something that I want to point out here is that [00:23:33] the main issue that we have with measuring the current account is that we cannot measure [00:23:40] the income balance very accurately. So actually the inaccuracy in measuring the income balance [00:23:47] is even larger than the inaccuracy in measuring unilateral transfers. So to give you an idea, [00:23:55] when we sum up the current accounts from every single country in the world, that should sum up to [00:24:03] zero because imagine that you have your neighbor. If you are lending money to your neighbor, [00:24:10] that means that your neighbor is borrowing money from you. So if you think that the world is [00:24:16] comprised of only your neighbor and you, then the sum of what you lend to your neighbor plus [00:24:22] what your neighbor borrowed from you that has to sum up to zero by definition. So the current [00:24:28] account of all the countries in the world needs to sum up to zero in principle. However, when we [00:24:36] measure the current account for all the countries in the world, we find out that the country is [00:24:41] running a deficit of around 5% within itself. Meaning that when we sum up the current account, [00:24:48] we get a negative number of around 5% of all the GDP, all the product produced in the world. [00:24:58] So this tells us that there is a pretty big inaccuracy in terms of measuring the current account [00:25:04] around the world. Now when we look at the trade balance, this should also be true because the [00:25:10] amount of goods and services that I exchange with the rest of the world also needs to sum up [00:25:17] to zero. It's the same case if you go to your neighbor and you ask them for a cup of sugar, [00:25:23] then you give them the cup of sugar, they receive the cup of sugar and then you sum up [00:25:27] the cup of sugar that you gave them and you subtract from their side that they owe you a [00:25:32] cup of sugar that amounts to zero as well. So the trade balance when you sum it up among all [00:25:38] the countries in the world also should sum up to zero. It turns out that when we add that up, [00:25:44] we get a deficit that is not 5% like we do when we are measuring the current account, [00:25:49] but it amounts to roughly 1%. So it's much better measured than the current account. [00:25:57] So sometimes for us as economists, we prefer to look at net exports as a measure of capital flows [00:26:03] rather than the current account because we know that income balance is very poorly measured [00:26:09] in the data. However, because the trade balance is the biggest component of the [00:26:15] current account, it's still going to be very informative for many different things. [00:26:21] So a question that is now kind of screaming for here is, has the US been a net debtor or lender [00:26:31] historically? Okay, because we only looked at what had happened from 1960 onwards, [00:26:37] but we haven't looked at what happened before then. And it turns out that when we look at [00:26:44] a historical plot, here we have US goods trade balance from the 1800s. So what you can see here [00:26:56] is that from the 1800s up to 1880 more or less, the US was a net debtor. So the fact that the [00:27:06] US is a net debtor now is not new. And you can hear this very often in the papers or being argued [00:27:14] by politicians or so on that it's really worrisome that we're running such large trade deficits. [00:27:26] And they talk about it as if it's a new thing because globalization is a new thing. It's [00:27:30] something that started happening 30 or 40 years ago. But when you look at this plot, [00:27:36] you can see that this is not the case. Actually, the world in the 1800s was a very open world. [00:27:42] We know that there was a lot of trade going on. And as you can see, the US for many, many, many [00:27:48] years was actually holding a trade balance deficit as well. So this is not a new situation. [00:27:55] It's something that came back. It did stop for a while. But now we are in a situation [00:28:01] that is very similar to where we were in the 1800s. So this is not a nuance. It's what I want to, [00:28:09] the point that I want to make with this plot. Okay. So who are the US main trading partners? [00:28:25] And this is relevant because we want to know who's giving us the resources in some sense. [00:28:31] And as I mentioned before, we know that if a country is running a current account deficit, [00:28:40] there has to be another one that is running a current account surplus. Because when we sum [00:28:45] them up, they have to sum up to zero. So who are the main US trading partners? The main US [00:28:50] trading partners are Mexico, Canada, China, France, Germany, UK, and South Korea. Those are the [00:28:59] main partners. But of course, we know that there's one of them that is more important than everyone [00:29:06] else. And I guess it's what is in everyone's mind. So China is the main trading partner of the US. [00:29:15] And here we have a plot of the goods and services trade balance in the blue. Again, [00:29:23] in red, we have the goods balance. And in green, we have the service balance. You can see that in [00:29:30] terms of more or less the trend and whether it's positive or negative, we are getting exactly the [00:29:37] same when we just look at the situation vis-à-vis China than when we look at the aggregate. [00:29:42] Meaning that the US exports services to China. We import goods. And as a result, because the [00:29:51] imports of goods is much, much, much larger than what we export in services when we look at the [00:29:57] trade balance of goods and services is still negative. Less, slightly less so than the one [00:30:04] for goods, but still very negative. So overall, the deficit with China nowadays is around [00:30:13] 2% of GDP. And that's what that negative 2% means in there. Okay. So given that we know [00:30:28] that if someone is running a current account deficit, someone must be running a current [00:30:34] account surplus, then who are these countries who are running the current account surpluses [00:30:41] and who else is running a current account deficit? So let's take a look at that. [00:30:48] So here we have a map of all over the world. And in red, you see the countries that are running [00:30:56] a current account deficit. And in green, you have the countries that are running a current [00:31:02] account surplus. So the brightest red is representing the largest current account deficit. [00:31:12] And the strongest green is showing you the largest current account surpluses. So you can see that [00:31:20] the US is, of course, the country running the biggest current account deficit here. [00:31:29] And the other countries that are running current account deficits are Canada, for example, Argentina, [00:31:37] Brazil, Australia, India, Spain, the UK, to name a few. So does this make sense? Is this natural [00:31:50] to expect or not natural to expect? So I think it is. Why is this the case? So we have countries [00:31:59] for example like Australia. Take Australia for a moment. Australia is an island. And they have very [00:32:05] particular climates, very particular geography. As such, it's natural to expect that them as a [00:32:12] country cannot produce every single good that they would like to consume. So to that extent, [00:32:18] they probably need to import a lot of goods in order to satisfy their consumption needs. [00:32:24] And that's what we are seeing in the data. That's the case for them. Then take Canada. Canada is a [00:32:30] country that specializes in the production of few goods. Also, because of the climate there, [00:32:36] a lot of goods don't grow when it comes to agriculture and so on. So it's also natural [00:32:42] to expect that they're going to be importing a lot of goods. Then we have countries that are [00:32:48] mainly exporters. The main exporters here are China, which is the biggest one. Saudi Arabia. So [00:32:57] Saudi Arabia is the one, let me see, this one here. Russia up here. And Japan actually here is [00:33:09] also a big exporter. So these countries are mainly shipping goods and services outside their country [00:33:21] more than what they are receiving. So their current accounts are in surplus. So you can see [00:33:28] there's a wide variety. Some countries are debtors. Some countries are lenders. And now [00:33:35] I want to take a look at the question of whether it is sustainable to be a net debtor. If you're always [00:33:46] in debt, is this sustainable? Can you carry this out for many, many, many years, like we've seen [00:33:53] in the data that is going on with the U.S.? Or should we actually be worried about this? Is [00:33:58] this worrisome or is it not? So I want to give you a very simple example. And you're going to have to [00:34:05] kind of bear with me for a moment because it might be kind of a little complicated. But imagine for [00:34:12] a second that we live in a world that is going to last for only two years. Okay? If we have a world [00:34:19] that is only going to last for two years, we're going to take a look at what the current [00:34:25] account is in the first year and what the current account is in the second year. But before that, [00:34:32] we need to assume one thing. If we know that the world is going to end in two years, [00:34:39] what do we need for anyone to lend us any money? They want to know that we're going to [00:34:47] give them everything back. So the main assumption we're going to make in this very, very, [00:34:52] very simple world is that by the end of the two years, you're not going to owe anything to anyone. [00:34:59] So here we have three, basically two objects that I want you to focus on. So the first thing [00:35:07] is that we can define the current account from a different perspective in some sense. [00:35:14] We can define the current account as the change in the net international investment position, [00:35:21] meaning that external financial assets minus liabilities. That can be the definition of the [00:35:28] current account. Why is this the case? If we think about the change in external financial assets [00:35:36] minus liabilities, this means that external financial assets minus liabilities is going to [00:35:43] tell us if we are in debt or not because we're taking all the assets and subtracting all [00:35:48] the liabilities. We already talked about how the current account tells us something about whether [00:35:53] we are an debtor or a lender. So I'm not saying anything different to what we already said before. [00:36:00] Just take the net international investment position and see how it changes over time. [00:36:06] And that's what's going to be what I call the NIP, which is just the international investment [00:36:11] position in period one. So that's a subindex one minus the one with the subindex zero. [00:36:19] That's going to be the current account in the very first period. [00:36:23] So that would be the first year in this economy. Then take the second year in that same economy [00:36:30] and we're going to measure the current account in the same way. It's just the change in [00:36:36] my net position of assets, which is the external financial assets minus my liabilities. [00:36:43] That is going to give us the two first equations in this slide. Now let's combine those two [00:36:50] equations because in the two equations we have the net international investment position [00:36:56] in the first year, which is the sub one that we see there. So we can take those two equations, [00:37:02] combine them and because we assumed that at the end of the two years we're not going to be in debt [00:37:08] with anyone, that means that the net international investment position in period two is equal to zero. [00:37:17] And that's going to tell us or give us our third equation, which is just saying that the net [00:37:23] international investment position at the very beginning of time, so at the beginning of [00:37:28] those two years is equal to the negative of the current account in the first year minus the current [00:37:36] account in the second year. Now we saw that if a country is a net debtor the current account is [00:37:46] negative. So if we have a negative sign in front of the current account of the first year that [00:37:53] gives us a positive number minus another negative number is also a positive number. So all of this [00:38:01] expression right there, so here the subtraction of these two elements there is positive if we assume [00:38:12] that there was a current account deficit in the two periods. So that means that as long as we start [00:38:20] the beginning of the world, which is the beginning of a world that lasts these two periods, [00:38:25] with a positive asset position, which is what having a net international investment position [00:38:32] that is positive means, then a current account that is negative in those two periods is [00:38:40] completely sustainable. Now I could show you that this actually extends to a world where [00:38:47] we live for many, many, many, many years, not only those two years, just exactly in the same way [00:38:52] that I did this exercise for those two years. So what I'm telling you from a very simple perspective [00:39:00] which here I kind of wanted to show you from the specific doing a specific calculation how this [00:39:07] comes across, what I'm just telling you is that if you start in a position where you have [00:39:13] positive assets in a country, it doesn't matter if you run a current account deficit period after [00:39:21] period after period, it's going to be sustainable and it's sustainable mathematically and then we [00:39:28] shouldn't worry about it. Now something that I get asked quite a bit by people is well okay one [00:39:35] thing is that your model can show us that that's sustainable but is this really true [00:39:40] in the world and I'm going to show you a case of a country where this is actually [00:39:46] being the case. So if we look at the trade balance for the UK historically, this is from the 1800s. [00:39:57] The UK has been running a trade balance deficit forever. Do you ever [00:40:05] worry about this situation in the UK or do you hear everyone worrying about this and let's [00:40:11] abstract from Brexit right now so let's ignore that that's going on right now but apart from that [00:40:18] no one is really worrying about the current account deficit for the UK. It's normal [00:40:24] but we tend to hear a lot more worries about the deficit in the US and it's been going on for [00:40:30] a lot less than what has been going on in the UK. So this is just to make the point that this can [00:40:38] actually happen. We can have a world that for more than 100 years, a country sorry, that for more than [00:40:45] 100 years has been carrying a trade balance deficit and it's okay so I want you guys to [00:40:54] kind of remember this point. Okay so let's move from the current account to public debt [00:41:09] because there are a lot of worries when it comes to the relationship of these two objects. So [00:41:17] one of the components of the current account is the change in debt. So in public debt specifically [00:41:27] not just private. So when we look at just US public debt since 1952 as a percentage of GDP so again [00:41:35] this is the overall debt that the US government is holding as a percentage of GDP over the years. [00:41:45] We can see that in 1952 it was around 73% of GDP. It went down to around 20-30% of GDP in [00:41:55] 1982 more or less and now we are at a point where it's around 105% of GDP. This might sound like a lot [00:42:05] but is it really a lot or not? How is this related to the fiscal deficit? Because now I want you [00:42:15] guys to link the or have the understand the relationship between a current account deficit [00:42:23] and a fiscal deficit. Okay so what is the fiscal balance? The fiscal balance is government income [00:42:32] minus government expenditure such that a negative number in the fiscal balance is a fiscal deficit. [00:42:41] It means that we are spending more than what we are receiving as a government. [00:42:47] And what is government debt? Government debt which is the plot that we just saw before here [00:42:55] is going to be given by the accumulation of fiscal deficits. In other words if the government [00:43:03] is constantly spending more than what they are collecting this is going to take them to [00:43:10] accumulate debt. And there's going to be a feedback between this accumulation of debt through the [00:43:21] accumulation of fiscal deficits and the debt itself because one of the things that goes into [00:43:28] government expenditure is the servicing of the debt meaning all the interest payments that we [00:43:34] need to make on debt are also a government expenditure. So the more debt that we have and the more [00:43:40] interest that we're paying the higher the government expenditure and if the government [00:43:47] expenditure is larger than the government income consistently this means that we are [00:43:52] accumulating more and more debt and that becomes a circle right that fits back into one [00:44:00] another. Now is this worrisome or not? Is there really a relationship between the fiscal and the [00:44:09] current account deficits? So I want to leave you guys with a couple of images. This is the US [00:44:18] fiscal balance since 1954 and what we see is that there was no deficit or a considerable [00:44:29] deficit basically up to 1974 and after 1974 we start getting a fiscal balance that is more and [00:44:37] more negative with the exception of 99 where it goes positive for a little bit and then starts [00:44:42] coming back down becoming negative and remember that a negative fiscal balance is a fiscal deficit. [00:44:50] So right now we're running a fiscal deficit that is around more or less 4% of GDP [00:44:57] in the great recession or a little bit afterwards it went down all the way to 10% or up because it's [00:45:06] a deficit so the deficit went all the way up to 10% and now it's gone down slightly. Now if it's [00:45:16] true that one if we go back to what we were talking about if it's true that we see that debt fits into [00:45:27] the fiscal deficit through the fact that government expenditure goes up when we have to pay higher [00:45:33] interests on the debt and as a result we end up having a larger fiscal deficit which a change [00:45:43] in the fiscal deficit also ends up being more debt then we would expect a very close relationship between [00:45:52] the fiscal deficit and the current account deficit. Now let me show you how that looks. [00:46:00] This is how it looks in the blue line you can see the fiscal deficit or the fiscal balance [00:46:06] which when it takes a negative value it's a fiscal deficit and the US current account balance [00:46:11] that's in the red line. So to give you an idea look at the numbers when for example around 2009. [00:46:21] So when we look at the numbers around 2009 we can see that the fiscal deficit was actually much [00:46:26] much larger than the current account deficit so in terms of relative size when we think about [00:46:35] the current account deficit it's not as large compared to the fiscal deficit. Now the other thing [00:46:41] that I want you to notice from this plot is the difference in the behavior prior to 1985 and [00:46:47] after 1985. So prior to 1985 it seemed like at least the trend of both was going in more or less the [00:46:57] same direction. They were both increasing the deficit of both the current account and the [00:47:01] deficit was increasing. Now it turns out that after 1985 the situation is pretty different. [00:47:10] We see for example in 1991 that the current account deficit is subsiding while the fiscal deficit [00:47:17] is increasing. Then when we get to 1999 2000 more or less we see the fiscal deficit actually [00:47:27] disappearing and going to a fiscal super habit or surplus while the current account remains negative. [00:47:35] Then when you look at 2009 we see a fiscal deficit that is pretty large of around 10% [00:47:42] but the current account deficit is actually subsiding so it's decreasing. So when we look at it just [00:47:51] you know a bare sight the correlation between the fiscal deficit and the current account deficit [00:48:02] seem to be even negatives. So in other words we cannot really say that there's a systematic correlation [00:48:11] between the current account deficit and the fiscal deficit here in the U.S. and this is [00:48:18] something that a lot of people worry about because they tend to think that if we have a [00:48:22] large current account deficit then this is going to also imply that we're going to have fiscal [00:48:27] deficits that are unsustainable. So I showed you that it's fine to sustain a current account deficit. [00:48:38] A country can do it. We have an example of a country that has done it. I've shown you that [00:48:43] the current account deficit in terms of a percentage of GDP is not remarkably large [00:48:49] especially when we compare it to the fiscal deficit. And I've also shown you that even [00:48:54] though we tend to think that a current account deficit fits into a fiscal deficit [00:49:00] this is not necessarily the case because the data doesn't support this because there are many [00:49:05] other elements that go into a fiscal deficit like taxes so all government income is going to affect [00:49:14] the fiscal deficit as well. So I want to leave you guys with basically three takeaways. [00:49:22] The U.S. current account deficit is sustainable and from an economist's perspective there's no need [00:49:28] or no there's no need for trade wars in the sense that we shouldn't worry so much about [00:49:34] reducing our imports and increase our exports because at least from this standpoint there's no [00:49:41] reason to think about the fact that this is necessary because this is doing us harm in any way. [00:49:47] And finally there's no systematic relation between the current account and the fiscal deficit [00:49:52] so this is also something that shouldn't be an argument for forcing us to reduce [00:49:58] the current account deficit that we currently observe in the U.S. Thank you.