Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate

23 Pages Posted: 17 Apr 2008 Last revised: 17 Aug 2010

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Date Written: April 2008

Abstract

The large trade and current account deficits of the United States cannot continue indefinitely because doing so would constitute a permanent gift to the U.S. economy. The process that will cause this gift to shrink and that will eventually cause it to reverse is a fall in the dollar. The dollar will fall as private investors and governments become unwilling to accept the risk of increasing amounts of dollars in their portfolios, especially in a context in which they realize that the dollar must fall to reduce the trade imbalance. Although a more competitive dollar is the mechanism that will cause the U.S. trade deficit to decline, the fundamental requirement for a lower trade deficit is an increase in the U.S. national saving rate. So a rise will be driven by higher household savings of the coming years as the two primary forces that depressed savings in recent years are reversed: the exceptionally rapid rise in household wealth and the high level of mortgage refinancing with equity withdrawal.

Suggested Citation

Feldstein, Martin S., Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate (April 2008). NBER Working Paper No. w13952, Available at SSRN: https://ssrn.com/abstract=1121742

Martin S. Feldstein (Contact Author)

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