The balance on the US current account - which includes the balance on goods and services, income transfers and unilateral payments -- totaled 804 billion in 2005. This comprises about 6.7% of US GDP. The US current account deficit has continued to increase at an alarming rate, yet the currency markets have not punished the dollar. The US economy continues to hum along, growing about 3% a year. This situation has created a feeling of complacency.
However, just because things look good does not mean a painful adjustment cannot happen.
Below I will compare the overall macro-economic statistics of the 5 Asian economies hardest hit in the Asian Financial Crisis of 1996-1997. As with the US, these economies looked just fine from their macro-numbers.
In fact, many looked a great deal better in 1996 than the US does in 2005. However, within the period of 1 year, all these economies experienced a painful correction.
The following observations in blockquote from a paper titled The Onset of the Asian Financial Crisis by Steven Radelet and Jeffrey Sachs. The paper is available for $5 from the National Bureau of Economic Research's website.
One reason that the crisis was largely unanticipated by international lenders and most market observers was that many of the signals that analysts normally associate with impending problems showed little sign of deterioration.
Let's stop right here and take special notice of that observation. Everything looked good from the macro economic perspective. Let's look at the following statistics from the US. GDP growth for 2003-2005 was 2.7%, 4.2% and 3.5%, respectively. Unemployment is 4.8%. Corporate profits are up for the last several years. Consumer sentiment is high. Everything looks hunky-dory.
However, the Asian economies were in fact better off than the US in some important ways.
Government budgets, which were the center of economic crises in Latin America in the 19980s, registered regular surpluses in each country...All countries maintained a fairly responsible budgetary position between 1990s and 1996.
Budget surpluses were all around the region. Unlike the US, which use to have a budget surplus - until we elected a fiscally responsible Republican.
Similarly, domestic savings and investment were very high throughout the region, suggesting that even if foreign capital flows slowed, robust growth could continue.
The US has had a negative savings rate for the last 11 months. The US savings rate has declined for the last 20 years. US investment is good, but not great.
World interest rates have been unusually low in recent years, so that the burden of repaying foreign obligations did not seem onerous.
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The authors wrote the paper in 1998, which explains why they use present tense in describing interest rates. However, low rates are a sign of contained inflation, which is also a sign of economic health. US rates are also low - so low that former Fed Chairman Greenspan called their levels a "conundrum."
The point of the above observations is simple: everything looked fine. The Asian economies were expanding; there were few observable warning signs on the horizon. In fact, many of the economies were in better technical shape than the current US economy. Their savings rates were higher, they invested more and they ran budget surpluses.
However, there were several warnings signs that are eerily similar to the current US situation.
Current account deficits were growing increasingly large across the region in the early 1990s and wer efar higher that they had been in the late 1980s. Between 1985 and 1989, current account deficits averaged just .3% of GDP in the five countries....By contrast, between 1990-1996, current account deficits averaged 4% of GDP and in most countries were rising.
Notice that these current account levels are below the current US level of 6.7%.
Probably the biggest sign of growing risks were in the financial sector. Financial institutions were becoming increasingly fragile throughout the 1990s....Apparently much of this credit [from financial institutions] headed for speculative real estate markets, rather than increasing productive capacity for manufactured exports as in earlier periods.
In the US, mortgage loans have increased from 33% of bank assets to 39% over the last 5 years. 40% of the homes purchased in the US last year were second homes. Housing inventory is rising and affordability is low. In other words, speculative excess appears to be pretty high in the US.
The point of all this is straightforward: The US looks great on the outside, but there are big problems underneath. And economies that were in technically better shape than the US have experienced a sharp and painful correction. There is no reason to think the same could not happen here.