page_title: Causes of the Great Recession
section_title: Globalization and Trade deficits
hierarchical_section_title: Causes of the Great Recession / Macroeconomic conditions / Globalization and Trade deficits
caption_attribution_description: English: U.S. Trade Deficit Dollars and&#160;% GDP Source Data For a discussion of the issues behind this chart, see: Bernanke - The Savings Glut Source data is from the Bureau of Economic Analysis. BEA-GDP Data BEA - Current Account Data Download the spreadsheets indicated on these pages for the information. I have calculated&#160;% GDP by averaging the four quarters of the year presented in the BEA data to arrive at the GDP amount (denominator). The GDP data is presented as current dollars. However, it is unclear if the current account data is in current dollars. However, the Bernanke speech cited above (first paragraphs) indicates these numbers are very close to what he is citing, so I am assuming these are current dollars. If you have a current account data source that states clearly it is current dollars, let me know and I will revisit the computation.
context_page_description: Many factors directly and indirectly caused the Great Recession that started in 2008 with the US subprime mortgage crisis. The major causes of the initial subprime mortgage crisis and following recession include the Federal Reserve lowering the Federal funds rate and creating a flood of liquidity in the economy, international trade imbalances, and lax lending standards contributing to high levels of developed country household debt and real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions. Once the recession began, various responses were attempted with different degrees of success. These included fiscal policies of governments; monetary policies of central banks; measures designed to help indebted consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.
context_section_description: Globalization and trade imbalances contributed to enormous inflows of money into the U.S. from high savings countries, fueling debt-driven consumption and the housing bubble. The ratio of household debt to disposable income rose from 77% in 1990 to 127% by 2007. The steady entry into the world economy of new export-oriented economies began with Japan and the Asian tigers in the 1980s and peaked with China in the early 2000s, representing more than two billion newly employable workers. The integration of these high-savings, lower wage economies into the global economy, combined with dramatic productivity gains made possible by new information technologies and the globalization of corporate supply chains, decisively shifted the balance of global supply and demand. By 2000, the world economy was beset by excess supplies of labor, capital, and productive capacity relative to global demand. But the collapse of the consumer credit and housing price bubbles brought an end to this pattern of debt-financed economic growth and left the U.S. with the massive debt overhang.
  This globalization can be measured in growing trade deficits in developed countries such as the U.S. and Europe. In 2005, Ben Bernanke addressed the implications of the USA's high and rising current account deficit, resulting from USA imports exceeding its exports, which was itself caused by a global saving glut. Between 1996 and 2004, the USA current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the USA to borrow large sums from abroad, much of it from countries running trade surpluses, mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the USA) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the USA to finance its imports. This created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. Foreign investors had these funds to lend, either because they had very high personal savings rates (as high as 40% in China), or because of high oil prices. Bernanke referred to this as a "saving glut." A "flood" of funds (capital or liquidity) reached the USA financial markets. Foreign governments supplied funds by purchasing USA Treasury bonds and thus avoided much of the direct impact of the crisis. USA households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities. USA housing and financial assets dramatically declined in value after the housing bubble burst.
caption: U.S. Current Account Deficit
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