As the global perspective makes clear, the reduction of the U.S. current account deficit also requires efforts on the part of the surplus countries to reduce the excess of their desired saving over desired investment.  Over the longer term, the current account surpluses of the emerging-market countries seem likely to narrow as domestic spending catches up with income.  Economic policies in these countries can assist this process.  For example, the oil exporters have collectively saved much of the windfall arising from higher crude prices in recent years; they should spend more in the future to develop and diversify their domestic economies.  China has officially recognized the need to increase its domestic spending and scale back its reliance on exports.  Measures that could help achieve these goals include further reforms of the financial sector; increased government spending on infrastructure, environmental improvement, and the social safety net; and currency appreciation.  In East Asia excluding China, continued efforts to strengthen and deepen the banking sector and financial markets would help domestic investment recover from the lingering effects of the financial crises of the 1990s.  In each of these cases, the indicated policies would reduce global imbalances.  Moreover, as with U.S. saving efforts, these actions would convey important economic benefits to the countries undertaking them even if current account balances were not an issue.

What implications would a gradual rebalancing have for long-term real interest rates?  The logic of the global saving glut suggests that, as the glut dissipates over the next few decades and thereby reduces the net supply of financial capital from emerging-market countries, real interest rates should rise--a tendency that seems likely to be only partly offset by increased saving in the industrial countries.  However, factors other than the saving-investment balance affect long-term interest rates, including the relative supplies of, and demands for, long-term securities and changes in the required compensation for the risk embedded in term premiums.  Moreover, distant one-year forward interest rates remain low, an indication that markets currently do not expect much change in the global balance of desired saving and investment or that they expect the effects of such a change to be offset by other developments.  Accordingly, we are again reminded of the need to maintain appropriate humility in forecasting returns and asset prices.

Current Account Balances
(Billions of U.S. dollars)

1. Calculated as the sum of the balances of the thirteen euro-area countries. Return to table

Source: For the United States, Department of Commerce, Bureau of Economic Analysis.  For some countries other than the United States, national sources; for most countries, however, International Monetary Fund (IMF), World Economic Outlook Database , April 2007 (www.imf.org/external/pubs/ft/weo/2007/01/data/index.aspx); some values for 2006 are IMF estimates.