America has done so well, we need less in the way of precautionary savings, and so we spend more on imports:
The early 1980s marked the onset of two striking features of the
current world macro-economy: the fall in US business cycle volatility
(the "great moderation") and the large and persistent US external
imbalance. In this paper we argue that an external imbalance is a
natural consequence of the great moderation. If a country experiences a
fall in volatility greater than that of its partners, its relative
incentives to accumulate precautionary savings fall and this results in
an equilibrium permanent deterioration of its external balance. To
assess how much of the current US imbalance can be explained by this
channel, we consider a standard two country business cycle model in
which households are subject to country specific shocks they cannot
perfectly insure against. The model suggests that a fall in business
cycle volatility like the one observed for the US relatively to other
major economies can account for about 20% of the current total US
external imbalance.
Here is more. Here is a non-gated version. Of course the risk here is that if things finally do go bad, the ex post costs are especially bad, even if the lack of insurance was ex ante optimal.
This is very interesting because I have thought for a while that the financial deregulation of the 1970′s took power away from banks, and hence the Fed, and gave it to non-regulated lending agencies such as GE Financial. Recently I read that banks own less than 30% of the total lending market. Since GE Financial, and mutual funds, don’t practice fractional reserve banking, they don’t expand and contract credit at all, and certainly not in a procycle way like banks do. This could explain some of the less volatility in the economy.
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