Why higher US savings won’t save the pandemic-hit economy by @michaelxpettis https://pro.creditwritedowns.com/p/why-higher-us-savings-wont-save-the?r=ezbt&utm_campaign=post&utm_medium=web&utm_source=twitter

A few thoughts here on the @michaelxpettis piece. This observation is critical: "the United States is one of the few countries in the world that has no control over its domestic savings rate. The United States runs a current account deficit not because it saves too little" /2

What I believe Michael is saying is that the US dollar's role as the world's reserve currency means the capital account dominates the current account for the US. /3

And that leads here: "This dynamic has very important consequences during the coronavirus pandemic because the problem of excess savings by other countries is poised to get even worse."

The US will absorb this savings. /4

But, the 'bad' outcome is this:

"if the current account deficit expands and business investment declines—both scenarios that are possible and even likely—total American savings actually must decline to balance lower investment and a higher current account deficit." /5

In the 'bad outcome':

"any increase in savings among some American households must result in a reduction in savings in other American households. If this balancing out isn’t caused by increasing consumer debt, it must be driven by rising unemployment." /6

Bottom line: if households and businesses reduce consumption and investment while a scramble for dollar liquidity is underway, the policy response in Washington has to be large or you're going to get a Depression with a capital D

/end