Dr Jeffrey Frankel, on leave from the University of California at Berkeley as Senior Staff Economist at the Council of Economic Advisers in Washington, addressed a lunchtime CEPR meeting on 1st May. He spoke about 'The United States in the World Economy,' the title of the chapter for which he was responsible in the 1984 Economic Report of the President.

Dr Frankel's presentation focussed on the sources of the trade deficit and of the strong dollar. The US trade deficit is expected to go substantially over $100 billion in 1984. This large excess of imports over exports is responsible for severe protectionist pressures. It is financed by a capital inflow from abroad so great that the US is projected to become a net debtor country very soon.

The recent increase in the trade deficit can be traced partly to losses in net exports to countries experiencing debt service problems, as well as to the rapid expansion of income in the US recovery, which has outpaced other countries. But the main cause is clearly the sharp appreciation of the dollar in the past three years. By December 1983, its effective exchange rate (against the currencies of ten trading partners) was 52 per cent higher than its average for 1980! Little of this appreciation was offset by faster inflation abroad, so the dollar's real exchange value appreciated strongly too. Even relative to its average over 1973-79, the real appreciation of the dollar by December 1983 was 33 per cent. This loss of competitiveness could explain at least half of the projected 1984 trade deficit.

Dr Frankel considered several sources of the dollar's strength. Among them he emphasized the increased demand for dollar assets due to increased real US interest rates. These, in turn, he attributed primarily to declines in aggregate saving, particularly the large rise in the Federal budget deficit.

The discussion indicated that most of the audience shared Dr Frankel's views on why the US trade deficit is so high and the dollar so strong. Some indicated less equanimity than he, however, towards the international capital market consequences of the trade deficit and high real interest rates. The flow to the US of a large part of world savings, in effect substituting for US domestic savings and financing the US budget deficit, seemed difficult to justify on economic welfare grounds. It was also not unrelated to the debt servicing problems of many LDCs.