Friday, 15 August 2008

The big three and the big five

Here are the three largest current account deficits in the world; the US, Spain and the UK. Taken together, over the last 12 months, these three countries have imported $972 billion more than they have exported.

The numbers in white represent the current account deficits of each country in percent of GDP. The deficits in the UK and the US are certainly large, but the Spanish deficit is just shocking. Currently, it stands at 9.5 percent of GDP. No country can accumulate deficits of that magnitude without risking a major crisis.

If these economies are running up huge deficits, there must be other countries running up huge surpluses. Here are the countries with the five largest external surpluses.

Three of the top five are manufacturers, while the remaining two are oil producers. At least two of the three manufacturers - Japan and Germany - are not low wage economies, dispelling the myth that cheap labour is the essential requirement for maintaining a vibrant industrial base.

Comparing the deficit countries with the surplus ones produces an extraordinary observation. The combined deficit of the big three is almost the same order of magnitude of the big five surplus countries. Is that a statistical fluke, or is there something quite fundamental going on here?

There is nothing random about this observation. The big five surplus countries are selling huge amounts of goods and services to the deficit countries, who pay for these goods in cash. The surplus countries return this cash back to the big three deficit countries by either extending loans to deficit country governments and firms; depositing the money in deficit country banks, or buying assets in deficit countries. The deficit countries then use this recycled cash to buy ever more imports.

Let us illustrate this monetary recycling with some real world examples. It could be the Chinese government buying a US treasury bill, a Russian oligarch buying a house in Chelsea or a German factory manager depositing money in a Spanish Bank. However, the key takeaway from this process is that behind this circle lies a mountain of debt and asset transfers.

As any pawn broker will tell you, spending beyond your means through borrowing or selling your possessions is not something that can go on forever. Sooner or later, you have to stop spending and start paying back.

I think that point is now very close for the big three spenders.


Anonymous said...
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Anonymous said...

This blog does my head in. There are days when I just can't look out of fear of what I might learn about UK PLC.

I preferred being blissfully ignorant.

dearieme said...

Germany can just buy Spain, I suppose, but who will buy us?

ELI said...

The Russians have had a go at buying us up. Been down to West London recently.

Kak Vas Zavoot, tavarish

Anonymous said...

Бизнесмены русских купят весь Лондон. В каком количестве мы нуждаемся?

sobers said...

I've said it before, and I'll say it again for the benefit of anyone who wasn't listening at the back. The UK nation has been spending beyond its means, both privately and publically, for many years now. This post graphically shows the cycle we have become locked into over the last 5-10 years. In some ways the magnitude of the problem is in our favour. It's the old saw: owe the bank £100 and it's your problem. Owe them £100m and it's theirs! The chinese how have so much $ denominated assets that they daren't pull out for fear of causing a massive collapse and losing the value of the assets they hold. So they hang on, probably trying to slowly reduce their holdings, without too much fanfare.

What will come of it? The first thing to realise is that at some stage governments in the indebted nations will hit a borrowing barrier. Eventually they will go to the well and if it ain't dry, it'll be damned expensive. That will be a shock. Cue huge tax rises and actual spending cuts. Imagine the squeals of pain. Spending never fell in nominal terms in the UK even under the "Thatcher Cuts". Most "cuts" these days are just reductions in projected future increases in spending! If the government had to fill the £50bn+ hole in it's accounts without borrowing think of the tax rises required! It doesn't bear thinking about. But face it we must, because that's where we are heading........

Josh said...

sobers, well said.

aSteve said...

I'd looked into the UK's balance of trade in some detail and had some idea about the USA... I knew that BRICS was cash rich and that Germany was economically dominant in Europe... but what I'd really like to know is what the capital flows actually look like.

My hunch is that the UK borrows almost exclusively in Euros and dollars - which I infer from the fact that our foreign exchange reserves are pretty evenly split between Euros, Dollars and Gold by current exchange rates. If I'm right, either the UK is not dependent on borrowing from Japan, Russia, China or Saudi... or, at least, we're not exposed to their exchange rates.

What I'd love to see is an 8-node net-lending graph of the big 3+5... and, ideally a breakdown of the denomination of the debt. Does the USA borrow from China/Saudi and lend to the UK, for example?

I think this is important... especially in this era of historically low interest rates and volatile exchange rates.

Failing further insights from you, where did you get this information? If there is extra detail, I'd be very interested in it.