WASHINGTON: The savings behaviour of overseas workers goes some way to explaining the US current account gap, but does little to allay concerns about the future stability of the ever-expanding US residents' overdrafts.

Rising savings from demographically ageing societies, such as Japan and Germany, generate national current account surpluses when money is banked overseas in a relatively younger US economy.

Ideally, maturing capital-intensive economies should bank their savings in younger, labour-rich countries hungry for investment and development that offer more promising returns.

It leads older nations to run surpluses - exporting capital as Japan and Germany are doing - as the latter run deficits and import capital.

If this is the root of the US deficit, it may prove to be durable, and the turn of the clock could well see the situation unwind gradually without major disruption.

In recent speeches, Federal Reserve officials have stressed the role of worldwide demographics in explaining how US deficits have risen to unprecedented levels.

They see this avenue of reasoning as a cause for comfort, not angst.

As Germans and Japanese pensioners eventually draw down their savings over time by selling US assets, for example, ageing US workers should be building them up.

Deficits in wrong place

The big problem for the United States is the bulk of its current account deficit is in the "wrong" place.

Ageing industrialized nations, such as Japan and Germany, may indeed be saving more and investing in the US economy.

But this explains only a fraction of the inexorable rise of the US current account deficit.

Developing nations, the bulk of which have far younger workforces than the United States, are the main exporters of savings and capital to US assets.

For many economists, this is inherently unstable.

"If you're looking at a G7 world and ignoring everyone else, the US current account position doesn't look quite so bad," said Stephen King, chief global economist at HSBC.

He said the imbalance is not within G7 - the United States, Japan, Germany, Britain, France, Italy and Canada - but between the United States and younger economies in Asia and Latin America.

"Outside the realms of the G7, the demographic argument for the deficit becomes a lot weaker - the United States doesn't have a monopoly on young people of the world," King said.

In a report earlier this year, the McKinsey Global Institute said the ratio of households in peak earnings/savings modes to those in retirement will either be low or falling in all major economies of Europe, Japan and the United States for the next two decades.

The United States, where that ratio was still rising up to 2000, is no longer offsetting declines in Europe and Japan.

Plug the gap

The US current account gap, its shortfall in trade and financial flows, rose 25 per cent last year, to US$666 billion. The US$188 billion gap in the fourth quarter was 6.3 per cent of national income.

Fed chief Alan Greenspan, Fed Governor Ben Bernanke and St. Louis Fed President William Poole recently cited the surge in internationally mobile savings from countries with rapidly ageing workforces as a driver behind these deficits.

The resulting "global-saving glut," as Bernanke described it, has disproportionately gravitated towards a younger United States.

By 2030, indicate United Nations estimates, the United States will have 34 people of retirement age per 100 workers - up from 21 now. But the euro zone will have 46 and Japan 57.

The intra-G7 savings shift, as a result, would seem to make sense. But it is only a small part of the unsolved jigsaw puzzle.

The US current account deficit has risen US$546 billion since 1996 - but less than 1 per cent of that rise was accounted for by rising surpluses in other major industrial countries.

About three-quarters of the rise of the US deficit since 1996 was offset by rising surpluses in developing countries.

Agencies via Xinhua

(China Daily 03/28/2005 page6)