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January 15, 2005

The Trade Deficit as a Result of an Aging Europe and China

Professor Michael Pettis' WSJ op-ed " Deficit Attention Disorder" ($) calls attention to an important aspect of the U.S. trade deficit: aging populations in other countries. This means that the ratio of working adults to pensioners (or dependents) will be falling, which in turn means those countries had better do lots of saving now. This is true of the U.S. too, but we have less of a problem than most countries, including places such as China, which are thriving now partly because they have few retired people relative to productive people. The U.S. is a safe place to invest, too, and so foreign investment in the U.S. exceeds U.S. investment abroad. Foreign investment in the U.S. cannot be greater than U.S. investment abroad unless the U.S. runs a trade deficit. And so we do. In Pettis' words,
As Europe ages and its population declines, there will be enormous pressure to break the social model. Rising demands from pensioners, greater expenditures on health, increased military spending, and various other costs will have to be provided by a rapidly declining work force.

A reasonable long-term protective strategy might be to increase current European and Japanese claims on foreign economies in order to make the future adjustment process easier. Over the next decade, Europeans and Japanese would have to save as much as possible and use these savings to accumulate claims abroad. As their foreign claims accumulate while economic conditions are (relatively) good, they will be able to draw down on these claims to pay for the import of goods and services that they will need during their great adjustment periods....

With demographic crises threatening not just Europe and Japan, but also Russia and China, it makes sense for threatened countries to accumulate claims against the only part of the world economy that seems healthy and large enough to help the adjustment process. Of course, the only way to accumulate such claims is by running significant current-account surpluses against the U.S.

Posted by erasmuse at January 15, 2005 09:17 AM

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test 2

Posted by: Eric Rasmusen at January 15, 2005 10:00 AM

test 3

Posted by: Eric Rasmusen at January 15, 2005 10:07 AM

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