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Markets and Economy

Trade Imbalances Point to Economic Strength

Although some have assumed that the United States’ rising trade deficit is caused by its falling household saving rate, today’s trade imbalance actually reflects growing opportunity for both emerging foreign economies and developed nations like the US.

In the 1970s, the average US household put away 13 percent of every paycheck for a rainy day. The nation’s household saving rate has fallen steadily ever since, coming to rest at a historic low of around 3 percent today.

The decline in household saving has coincided with the massive expansion of the US trade deficit. Because a significant share of the cash Americans pay for imported merchandise is ultimately reinvested in the US bond market, it’s natural to wonder whether the growing bond holdings of foreign investors are actually plugging a shortfall in domestic savings.

However, this connection is tenuous at best. A broader view of household finances shows that the nation’s total savings are healthier than ever, and the trade deficit is being driven by economic development overseas, not a scarcity of capital at home.

Saving Versus Savings

The household saving rate provides only a limited view of the nation’s saving habits. This measure shows the proportion of household income that is being diverted from current consumption to save for the future, but it tells us little about the total wealth of US households. Although the portion saved out of every paycheck has fallen significantly, a broader look at household portfolios shows that they are actually in a strong financial position.

Rising asset values have pushed household net worth to an all-time high. People are likely saving less of their income because capital gains are doing the work for them. When the equity market is booming, households can meet their savings goals with a smaller share of each paycheck. The recovery of the residential real estate market also has boosted household wealth, bringing homeowners closer to their financial goals.

Additionally, Americans have more money than ever invested in stocks and bonds. It seems misguided to look at the low household saving rate and assume that the nation’s capital markets have become reliant on funding from overseas sources.

Overseas Cash

Foreign holdings of Treasurys and other dollar-denominated assets have risen in tandem with the US trade deficit—but the influx of foreign capital is being driven by industrialization abroad, not a shortfall of available funding from domestic sources.

Developing nations naturally run trade surpluses. Their citizens’ purchasing power is far lower than that of their richer trading partners, so export-focused manufacturing sectors tend to accumulate a surplus of foreign currency.

Following World War II, the US adopted the Bretton Woods system of fixed exchange rates, which allowed European economies to run trade surpluses as the continent rebuilt. Today, currencies are allowed to float on the open market, but many developing nations choose to reinvest a share of their surplus dollars in US Treasurys as a way of keeping exchange rates in check. This is a strategy to prevent their domestic currencies from rapidly gaining value, which would make their exported goods less competitive on the global market.

As a result, foreign holdings of US government debt have grown over the past decade. This dynamic is lifting living standards abroad and helping keep borrowing costs low at home. As a large middle class emerges in China and other developing nations, the expansion of consumer spending in the developing world should naturally temper trade imbalances, opening a massive market for US goods abroad. The US trade deficit is part of a growth and development story that’s creating widespread prosperity.

Foreign holdings of dollar-denominated assets shouldn’t be cause for alarm. US households have more money saved than ever, and the capital coming from overseas is a byproduct of international growth that’s likely to benefit everyone.

View our economic commentary disclaimer.

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.

Jim Glassman

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