STRICTLY CONFIDENTIAL (FR) CLASS II-FOMC

Materialsfor Staff Presentation to the Federal Open Market Committee

The US. External Position

May 21, 1984

Chart 1

U.S. Current Account

r
%

Billions of dollars

125
v ­

-

1948-80 Average = $.9 billion

a1

I l l 1 I r l l l l l l l l l l l l l l l l l l l r r l l l r l r I l l
1950 1955 1960 1965 1970 1975 1980

100

U.S. Current Account Relative to GNP

r

Percent

l2

I
1950

1948-80 Average = .2

YO

I
1970 1975 1980

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
1955 1960 1965
Note: 19W data are (11 estimates a1 an annual rate

Chart 2

U.S. External Investment Position
Billions of dollars
250

200

Cumulated Current Account'

\

,

a1

\- -

:

1 1 1 1 1 l l l 1 1 1 1 1 1 1 1 1 l 1 1 1 1 1 1 I I~ I ~I ~ l 1 1 1 l
'From base of 1948 recorded external investment position.
~ o t e 1984 data are 01 esllmates. :

Chart 3

-

ANALYTICAL FRAMEWORK

I Proximate Determinants
0

Price competitiveness Relative cyclical positions

0

Other factors International debt problems Oil

II Fundamental Determinants
0 0

Economic policies Asset preferences

Chart 4

Price Adjusted Foreign Exchange Value of the US. Dollar
March 19

00
30

20

10

Weighted Average Dollar*/ Relative Consumer Prices
00

90

80

70 1974 1976 1978 1980 1982

Real GNP
. . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. ...... .....................
.............................

1980 (

00 15

............................. .............................. ............................ ............................. ............................. ............................. .......................... .......................... ./ .........................
. . . . . . . . . . .. .. .. .. .. .. .. .. .. .............. ..........

05

............................. .............................
.............................

95

.............................

Foreign

.......... . . . . . . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .............................

............................. ............................. .............................

.............................

85

.............................

75 1974 1976 1978 1980 1982

E 19

‘Welghted averaw againat or of forelpn 0-10 cwnlrles ualnp total 1972.76 average trade of these Countries.

Chart 5

U S . Exports to Developing Countries
Billions of dollars 100

80

60

I

/
Debt Problems*
,I)(

............................ ............................ ............................ ............................ ............................ ............................ ............................

I 4u .^

, /

............................ ............................

............................ ............................

1
1984

^A

Lu

1970

1972

1974

1976

1978

1980

1982

0

*Includes Argentina. Brazil. Chile, Colombia, Ecuador. Mexico. Nigeria, Peru. Philippines and Venezuela. Note: 1984 data are 0 1 estimates at an annual rate.

Chart 6

Allocation of Decline in Current Account Among Proximate Determinants
Billions of dollars

1. Decline in Current Account, 1980 to 1984 01

- 85 - 70 - 20 - 15

2. Decline in U.S. Price Competitiveness

3 Cyclical - Relative Strength of U.S. Recovery .
4. International Debt Problems 5. Decline in Oil Prices and Consumption

+ 20

Chart 7

-

Estimated Impacts of Increase in Structural Budget Deficit
Calendar Years

1982

1983

1984

1. Increase in Structural Deficit

from 1981 Level ($ billions) Impact on Levels of:

35

66

102

2. Real GNP (percent)
3. Treasury Bill Rate (percentage points)
4. Exchange Rate (percent)

1'A

2 '/2

2 Y2

3 h

2

2 '/2

3 0

6 0

8
'h

5. Prices (percent)

6. Current Account Balance ($ billions)

-8

- 17

- 30

Chart 8

Percentage points

March 19

100

120

Price Adjusted Dollar
t

110

I00

90

80

I
1974

I

I
1976

I

I
1978

I

I
1980

I

I
1982

I

I

198

*Differential botwean US. and weighted average foreign longterm governmenl bond yields minus differential between 1 2 ~ u a r t e r entered c moving averages 01 US. and foreign Consumer price inflation rates.

Chad 9

r

U.S. Merchandise Trade and Current Account Balances
Billions 01 Actual Simulated with unchanged dollar irs

+

0

40

80

20

60

II
1982 1984

I
1986

I

I
1988

I

I
1991

DO

Explanatory Variables Simulated With Unchanged Dollar
Annual Average
1984 1985

1986-1990

1. Exchange Rate Index

130

130
Percent change, Q41Q4

130

Real GNP Growth Rates
2. United States
3. G-10 Countries
4. Developing Countries

5 23 h
3 '/z

Inflation Rates"
5. United States
6. G-10 Countries
~

5 53 h

5 /'4
6 '/2

5

63 h

'eased on cmsumer price andexes

Chart 10

Current Account Components Simulated with Unchanged Dollar
Billions of dollars
1983 1990

Change

1. Current Account

- 41 - 61
24
9
15

- 183 - 177
- 17 - 53
36

2. Merchandise Trade 3. Net Investment Income 4. Portfolio
5.

- 142 - 116
- 41 - 62
21

Direct

6. Other Services and Transfers

-4

11

15

Chart 11

Volume of Merchandise Exports and Imports
Ratio scale. 19,
7

00 80 70

-

Actual

60

50

40

30

20

10

I
1980 1982 1984

I
1986

1

I
19BB

I

I
199'

Chart 1 2

U.S. Current Account Relative to Foreign Net Saving'

r-

P C
I

nt

+

0 -

2

4

6

I I I I
I I

3

I

I

I

Actual Simulated with unchanged dollar

+ 0

-

-2

I
1 I 1 I
I

-

I

I

I

4

Chart 13

U.S. External Investment Position

-

Billions of dollars Actual Simulated with unchanged dollai

1300
1150

1980 1982

Actual

I 1984

1986 9

1988 0

1990

0

U.S. External Investment Position Relative to GNP Simulated with unchanged dollar

e

nt 10

5

:
5

i ,
1980 1982

Chart 14

-

SUSTAlNABlLlTY
0

External investment position relative to GNP must stabilize.

DESIRABILITY
0

Short run benefits Current account deficit reduces upward pressure on domestic interest rates. Growth of US. imports has expansionary effects on economic activit abroad and eases current account adjustment in countries burdened with debt.

0

Long run questions

To what extent is borrowing from abroad leading to greater capital
formation in the United States?
Is borrowing by the United States consistent with an efficient and

equitable allocation of world saving?

Chart 15

Foreign Exchange Value of the US. Dollar
March 19;

100

130

120

110

100

. I

\

90

\ \ \ \ \

80

\

'\
\

Rapid Depreciation
\----------------

70

I
1980

I
1982

I

I
1984

I

1
1986

I

I
1988

I

I
1990

Chart 18

Effects on U.S. External Position

r

Current Account
Blllions of

trs

: 40

80

20

60

1980

I

I

1982

I

I

1984

I

I

1986

I

I

1988

I

I

199

'00

External Investment Position Relative to GNP

r
1980

I

nt

4

+ 0

-

4

Gradual Depreciation Gradual Depreciation

8

Unchanged Dollar

12

1

I

1982

I

I

1984

I

I

1986

I

I

1988

I

I

199

Chart 1 7

Effects on U.S. Economy
Real GNP
Billions of 197 llars

I950

1900

1850

I800

I750

I700

I650

r

I
1984

I
1986

I

I
1988

I

I
1990

I600

Inflation

t

7

Pezent

Rapid Depreciation
/ /

/

/------\

-

Unchanged Dollar
\

-

1984 1986 1986 1990

Chart 18

Treasury Bill Rate

r

F

c
/ /
/'

/
/

\

\

' ,

Rapid Depreciation

Gradual Depreciation

\
I
1984

/
I
1988

I
1986

I

I

I

1990

Chart 19

Foreign Exchange Value of the U.S. Dollar -

March 1 9 7 3 100 ~

A
Gradual Depreciation Plus Fiscal Contraction

1

1””
110 100
90

I 3 O

Gradual Depreciation

Gradual Depreciation ‘Plus Change in Policy Mix

‘-.
I
1988

---I
1990

80

I
1980

I
1982

I

1
1964

I

I
1986

I

I

i 70 I

Chart 2 0

Effects on U.S. External Position

r

Current Account

Billions of d(Jilars


-

\
\
I I I I I

Plus Change in Policy Mix / I

, - -I
40

0

-

+

-

-

80

-- 120 -- 160

1

I

I

I

I

J

External Investment Position Relative to GNP
7

Percent
7

Plus Fiscal Contraction

-----_
Gradual Depreciation
8

12

I 1980

I

I
1982

I

I
1984

I

I
1986

I

I
1988

1

I
1990

Chart 2 1

Effects on
Real GNP

U S Economy ..
Billions of 197

llars

1950

1900

1850

I800

I750

I700

1650

l6M)

Inflation -

PI

It
8

-

Plus Change in Policy Mix
Depreciation

7

6
5

Plus Fiscal Contraction

I
1984

I
1986

I

I
1988

I

I
1990

4

Chart 22

Treasury Bill Rate
int
11

Gradual Depreciation

\

10

\

\

\

\

\ \ \
L -

' \

'----22-

Plus Fiscal Contraction

---I

9

8

--------I I
1988

Plus Change in Policy Mix
7

-\

' \
1984

I

1

\.
6 1990

1986

I

Federal Budget Deficit

r I

Billions

illars -100

Po--\­

- 140

- 180

- 220

II
1984

Gradual Depreciation

\
\
I
1990

- 260
-300

I

I

1986

I

I

1988

I