[Opinion] Worsening Imbalances in the US Economy Expected to Lead to Dollar Value Decline

In the past first quarter, the U.S. economy contracted by -1.4%, much lower than experts' expectations. Consumption and investment showed steady growth. This was due to a significant expansion of the deficit in the external sector. The widening external imbalance will eventually lead to a decline in the value of the dollar.

In particular, consumption, which accounts for 70% of the Gross Domestic Product (GDP), increased by 2.7%. Despite this, the economy experienced negative growth because exports decreased by 5.9%, while imports increased by as much as 17.7%. The contribution of net exports to economic growth was -3.2 percentage points. Assuming the external sector was balanced, the U.S. economic growth rate in the first quarter would have been 1.8% instead of -1.4%.

The reason for the increase in U.S. consumption and imports lies in the U.S. government's policy response. The economy sharply contracted due to COVID-19 in 2020. In March and April 2020, non-agricultural jobs decreased by 21.99 million. Jobs that had increased over ten years disappeared within just two months.

To overcome the economic crisis, the U.S. government spent $3.6 trillion and $1.9 trillion in 2020 and 2021, respectively. Especially in March 2021, $1,400 was paid to all citizens except high-income earners, and $400 per week was provided as unemployment benefits. As a result, the real disposable income per capita increased by 24% from the end of the previous year to $57,597 in March 2021. Based on this income increase, U.S. households continuously increased consumption.

However, domestic production in the U.S. could not support this, so imports inevitably increased. The rise in the dollar's value also contributed to the increase in imports. The trade deficit inevitably expanded. Last year, the U.S. trade deficit reached a record high of $861.4 billion, which was 48% higher than the average of the previous three years. The trade deficit from January to March this year was $288.8 billion, a 42% surge compared to the same period last year.

With the expansion of the trade deficit, U.S. external debt is increasing much faster than external assets. At the end of last year, net assets, calculated by subtracting external debt from external assets, were $18.1012 trillion, four times higher than 10 years ago (April 2011: $4.4546 trillion). During the same period, the ratio relative to GDP also surged from 29% to 79%.

Despite the large net external debt of the U.S., the dollar has remained strong because it is the key currency and foreign funds continue to flow into the U.S. through financial accounts.

At the end of last year, the U.S. net portfolio investment was -$12.1637 trillion, and net direct investment was -$3.8055 trillion. This means countries like China and South Korea exported to the U.S. and used the earnings to buy U.S. stocks and bonds and invest in U.S. companies. Additionally, the uncertainty in the global economy and financial markets caused by Russia's invasion of Ukraine has increased demand for safe assets like dollar-denominated assets, which also contributes to the rise in the dollar's value.

Federal government debt has also reached 130% of GDP. Both domestic and external imbalances are expanding simultaneously. Imbalances eventually seek balance. Recent sharp declines in the Nasdaq index suggest signs of a bubble burst in the U.S. stock market.

Considering this, capital inflows into the U.S. stock market are likely to decrease. This implies a high possibility of a decline in the dollar's value. If signs emerge that the Ukraine war is ending, this process could accelerate. It seems risky to invest unilaterally expecting the dollar's value to rise.

This content was produced with the assistance of AI translation services.