The Federal Reserve Bank of New York today released Financial Globalization and the U.S. Current Account Deficit, the latest article in its series Current Issues in Economics and Finance.
From 1999 though the end of 2006, the United States financed a string of large current account deficits by borrowing $4.4 trillion from other countries—a sum amounting to 85 percent of total net borrowing worldwide. Despite this heavy net borrowing, the United States has been the destination of only about 30 percent of total gross cross-border investments by other countries. This figure is proportionate to the U.S. share of global GDP and is even below the U.S. share of global equity and bond markets, according to authors Matthew Higgins and Thomas Klitgaard.
The striking divergence between the shares of gross and net flows going to the United States can be reconciled by noting that this was also a period of rapid financial globalization, with countries investing a record fraction of their saving abroad. This sharp increase in global cross-border investment made it possible for the United States to be the world’s principal net borrower while receiving an unremarkable share of other countries’ gross external investments. Significantly, the recent rise in U.S. cross-border investment has lagged the rise abroad. According to the authors, this shortfall has allowed the United States to finance its current account deficit while taking in a smaller share of other countries’ external investments.
Looking forward, the authors argue that it might be harder to finance continued large U.S. current account deficits on favorable terms if the recent wave of financial globalization were to subside or if U.S. investors were to invest a larger share of domestic saving abroad.
Matthew Higgins and Thomas Klitgaard are assistant vice presidents at the Federal Reserve Bank of New York.