It might be hard to spot. But there is an upside to the subprime lending debacle and ensuing turmoil, argue George Shultz and John Taylor, senior fellows at the Hoover Institution in Tuesday’s FT.
Signs of it were revealed by the absence of reporting on the big bugaboo of the past few years: the US current account deficit.
During the most up to date three quarters for which there’s data, the deficit has been cut by $119bn, falling from about 6 per cent of GDP to 5 per cent.
The budget deficit has fallen sharply, note the pair – one strand of a three-prong remedy. World economic growth, especially in emerging markets, has been strong, even as US growth has slowed. And China’s exchange rate has become more flexible — appreciating by 10 per cent since the peg was abandoned. But these changes would take time to effect the current account shortfall.
This is where the silver lining comes in.
The housing turmoil has indeed cut a chunk out of investment — residential investment has fallen by $81bn in the three quarters during which the current account deficit declined, and even more compared with the peak of the housing boom earlier last year.
The current account equals savings minus investment – and as house price growth has slowed, or declined, there is more household saving. Schultz and Taylor reckon about three-quarters of the reduction in the deficit can be attributed to housing ructions, assisting (and accelerating) the agreed economic policies.
This of course has implications for the dollar. Those who called the bottom of the greenback plunge on news that supermodels were no longer accepting dollars may have been onto something – although it eventually turned out that the US currency is still fair game in fashion.
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