Wynne godley, FT Special Commentator, If the US balance of payments deficit continues to rise and private savings do not deteriorate further, then either fiscal policy is gradually relaxed, making the budget balance worse, or the economy will face long-term stagnation, which will bring terrible consequences to other parts of the world. Only by intermittently increasing the net export demand of the United States can we solve this dilemma. The balance of payments deficit in the United States is now 5.5% of the gross domestic product (GDP), almost twice the previous low of 1986. Since 2002, the exchange rate of the US dollar against other major currencies has fallen by about 30%, which will alleviate the worsening trend. However, compared with other trading partners such as China, the exchange rate of the US dollar has not fallen at all, and the huge foreign debt accumulation caused by the deficit, accompanied by the continuous rise of the US dollar interest rate, will definitely increase the outflow of net interest expenses. As long as GDP continues to grow at a satisfactory rate, this outflow will increase the overall balance of payments deficit, reaching 7% in two years and 8.5% in 2008. Those who write about the current account deficit usually write about the unique dangers of foreign companies and the necessity of importing huge amounts of capital. At the same time, the US government's budget deficit has reached 4.2% of GDP. Many people have commented on the budget, and 65,438+00 Nobel Prize winners recently published an open letter about it. They all think that the increase of budget deficit is a manifestation of "financial irresponsibility" and needs to be corrected through financial restraint measures. There is an organic connection between the budget deficit and the balance of payments deficit, both of which are related to the development of the entire American economy. This point was not clearly recognized in the public debate. But as we all know, the budget deficit is equal to the sum of the balance of payments deficit and private net savings (the difference between private income and total expenditure). This equivalence is the missing link. Since 1952, the ratio of private net savings to GDP has averaged 1.8%. The fluctuation range of this ratio is quite small in most cases, which is obviously negatively correlated with the trend of net loans (keeping the fluctuation within a certain range), and recently negatively correlated with the abnormal trend of asset prices. This ratio is now negative 1.3%, and it seems likely to rise to the historical average level eventually, instead of staying negative all the time or falling indefinitely. This is because although personal savings have shrunk to almost zero, the value of private debt, private sector net loans and assets is still relatively high. But even if private net savings remain at the current level, an important conclusion will be drawn. The rising balance of payments deficit means that the budget deficit must worsen from now on if economic stagnation is to be avoided. We conditionally predict that the balance of payments deficit will reach 8.5% of GDP in four years, which means that the budget deficit will account for 7.2% of GDP. If we want to restore the net savings rate to 1.8% (a neutral assumption), then the budget deficit must reach 10.3% of GDP! Although these strange figures are derived mechanically, they have a basic economic principle: the predicted balance of payments deficit will consume so many circulating income streams, so if we want to avoid a deep recession, we need the same budget deficit to make up for the gap. However, everyone agrees that the budget deficit must be greatly reduced. This seems to be a reasonable goal, because deficits as high as 4.2% in the past have often been successfully reduced. But there has never been a balance of payments deficit close to 5.5%, so this has changed the rules of the game. If the balance of payments deficit continues to rise and private savings do not deteriorate further, then either the fiscal policy is gradually relaxed, making the budget balance worse, or the economy will face long-term stagnation, which will bring terrible consequences to other parts of the world. Only when the net export demand of the United States (relative to the export infiltrated by imports) increases intermittently can this dilemma be solved, but there will be various terrible obstacles. It is meaningless to advocate further depreciation of the dollar. It is necessary to make large-scale and complicated adjustments to the exchange rates of various countries, especially to let the RMB appreciate. At the same time, as the sustained growth of American net exports will have a deflationary impact on other countries, fiscal and monetary policies around the world must be repositioned. But these changes will not happen automatically under the influence of market forces. China and some other Asian countries believe that it is in their interest to maintain the status quo, and there is no obvious way to prevent these countries from accumulating dollar reserves. There is no sign that these countries and other countries (especially those in the euro zone) are aware of the obligation to further increase the domestic economy. How to design a necessary overall reform, the relevant specific deployment is beyond the scope of this article. But we have no doubt that once countries fully understand the existing problems, it is possible to come up with a cooperative solution. The critical moment may be just around the corner.