Two Sets of Twins? An Exploration of Domestic Saving-Investment Imbalances
The twin deficits are back. Their return from the 1980s and early 1990s is now unaccompanied by even a hint that curing the domestic fiscal deficit might well cure the trade deficit, too. The simultaneous expansion of the fiscal surpluses of the late 1990s with the trade deficit dashed that hope. While there is a significant amount of dissonant opinion, a large group of economists is persuaded that the nub of the chronic trade imbalance is the low U.S. saving rate. According to this view, domestic saving has been inadequate to fund current levels of investment. Consequently, offshore capital has moved in to fill the gap, keeping the dollar from falling to levels that would correct the ongoing trade imbalance. The saving-investment imbalance explanation of the trade deficits can best be understood as a "default" explanation dependent on the failure of traditional trade theory to explain why exchange rate adjustments have been unable to correct the chronic trade imbalance. This is not to say that the textbook story is without a measure of explanatory power. While certain bilateral balances, most particularly the Japanese-USA balance, show positively perverse relationships between the exchange rate and the trade balance, the real weighted exchange rate of the dollar moves in rough inverse correspondence with trade imbalances expressed as a percentage of gross domestic production.! It