In the COVID-19 era, the net national saving rate could well plunge as low as -5% to -10% over the next 2-3 years. That means today’s saving-short US economy could well be headed for a significant partial liquidation of net saving.
With unprecedented pressure on domestic saving likely to magnify America’s need for surplus foreign capital, the current-account deficit should widen sharply. Since 1982, this broad measure of the external balance has recorded deficits averaging 2.7% of GDP; looking ahead, the previous record deficit of 6.3% of GDP in the fourth quarter of 2005 could be eclipsed. This raises one of the biggest questions of all: Will foreign investors demand concessions to provide the massive increment of foreign capital that America’s saving-short economy is about to require?
The answer depends critically on whether the US deserves to retain its exorbitant privilege. That is not a new debate. What is new is the COVID time warp: the verdict may be rendered sooner rather than later.
America is leading the charge into protectionism, deglobalization, and decoupling. Its share of world foreign-exchange reserves has fallen from a little over 70% in 2000 to a little less than 60% today. Its COVID-19 containment has been an abysmal failure. And its history of systemic racism and police violence has sparked a transformative wave of civil unrest. Against this background, especially when compared with other major economies, it seems reasonable to conclude that hyperextended saving and current-account imbalances will finally have actionable consequences for the dollar and/or US interest rates.
To the extent that the inflation response lags, and the Federal Reserve maintains its extraordinarily accommodative monetary-policy stance, the bulk of the concession should occur through the currency rather than interest rates. Hence, I foresee a 35% drop in the broad dollar index over the next 2-3 years.
Shocking as that sounds, such a seemingly outsize drop in the dollar is not without historical precedent. The dollar’s real effective exchange rate fell by 33% between 1970 and 1978, by 33% from 1985 to 1988, and by 28% over the 2002-11 interval. COVID-19 may have spread from China, but the COVID currency shock looks like it will be made in America.
Stephen S. Roach, former chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of "Unbalanced: The Codependency of America and China."