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The world is in great flux, yet market participants are only beginning to appreciate the full magnitude of potential change. Donald Trump’s frequent, seemingly random threats and pronouncements often distract, but they typically share a common thread: a desire to reduce U.S. borrowing.
Current account balances provide statisticians’ best estimates of whether countries are consuming more than they produce or spending beyond their means. The chart shows that German, Chinese, and Japanese savings continue to fund ever-increasing levels of U.S. debt. Trump’s most consistent message has been that this must change. The key question is how it will be accomplished.
The path of least resistance – and least pain – for all parties would be for Germany to invest and import more. If the private sector can’t drive this shift, the German government must loosen its constitutional debt constraints (the “debt brake”) and find another way. Germany needs to borrow substantially more than its current 2.5% of GDP to offset stubborn private-sector savings. The shame is that such borrowing will likely fund more missiles, tanks and fighter jets, rather than building German roads, bridges, and other infrastructure.
