Discussion of “Current Account Fact and Fiction” Richard H. Clarida Lowell Harriss Professor of Economics Columbia University NBER

Why Does The US Have a Large Current Account Deficit? No single cause, but several important factors at work Low saving in the US, average investment A negative private S – I balance A budget deficit Also, a global general equilibrium outcome global saving relative to low invest drives down rates intervention Because of role of dollar, sound US monetary policy, and deep US capital markets, US destined to run a structural CA deficit of 2 to 3 percent of GDP

Adjustment US foreign liabilities in dollars, so revaluation effects are playing and will play a role, but not sufficient US has net foreign liability of 3 trillion but still earns more dividends, profits, and interest on 7 trillion of foreign assets than it pays on 10 trillion of foreign liabilities There do appear to be non-linear threshold effects in G7 current account adjustment, which is why exchange effects may be hard to find

Why I Thin k the Saving Glut Relative to Investment is part of the Story If just a US low saving story, we would expect high long term real interest rates, but real long term rates in the US and G7 are low If just an intervention story, then why would UK real long rates be falling and low? Instead virtually identical to US If just a budget deficit story, would have had current account surplus in 2000, not a deficit of 4 percent of GDP

How the Saving Glut story fits into this paper Ratio of household net worth to consumption is very high Since equity values are below bubble levels, and net foreign liabilities have increased, must be a function in part of home equity values Savings glut leads to low bond yields which push up real estate values Low bond yields support equity prices at historically high P/E’s