By Michael Pettis This post was originally published at China Financial Markets at the Carnegie Endowment for International Peace website According to a May 2020 CNN article, one consequence of the coronavirus pandemic is that “Americans are slashing their spending, hoarding cash and shrinking their credit card debt as they fear their jobs could disappear.” The article goes on to say that U.S. credit card debt has fallen by the largest percentage in thirty years while household savings rates have climbed to levels unseen since the 1980s.
Edward, this is a good article and I agree with Pettis on his prescriptions, although it seems doubtful Congress would allow any of those things to happen, which means pain for small business and their employees. I've got a few questions about this one:
I'm not particularly fluent in trade mechanics. How does foreign aid reduce the CAD? If foreign trade sends dollars for goods and foreign aid sends dollars abroad for no goods, how would that reduce the CAD?
Furhermore, Pettis says, "One possible scenario is that the U.S. current account deficit could contract, but...it is more likely that an incoming deluge of excess foreign savings will force the U.S. current account deficit to expand even more." Wouldn't an excess of foreign savings traded for dollars and used to buy US assets decrease the CAD?
Lastly, aside from this article, I'm wondering something else given the explosion in the corporate debt markets since the March lows: Do you know if all new corporate debt is new money, i.e, a loan which creates a deposit? Or is the newly issued debt traded from already existing dollars and reduces the stock of money market funds? Or is it a combination of the two? If a combination, what is the approximate balance?
Thanks. Hopefully you will have time to respond if possible.
Hi Edward, Michael Pettis was on the Hidden Forces podcast last week and it was excellent.
My question is what if government spending increased to incentivize businesses to bring their supply chains back to the US? Wouldn’t that have the double beneficial effect of increasing government spending and business investment ?