Until recently, the US was always the world’s “consumer of last resort”. Since the collapse of the Bretton Woods exchange rate system in the early-1970s and the subsequent huge increase in cross-border capital flows, the US easily absorbed more and more of the world’s surplus savings. This was particularly so in recoveries after US recessions. The US current account moved into modest deficit in the late-1970s and into much larger deficit in the 1980s. Thereafter, the deficits got even bigger, reaching a peak of almost 6 per cent of US gross domestic product before the onset of the global financial crisis.
The latest US recovery is, thus, unique. This time, the current account deficit has continued to shrink. Lots of explanations are offered, most obviously the decline in America’s dependency on imported fossil fuels thanks to the shale energy revolution. Yet, if that were true, Saudi Arabia and other oil producers should be running much smaller current account surpluses; mostly, they are not. Continue reading »