Interesting that his analysis does not lead him to believe in a crash of the American dollar, but rather a smoother longer term adjustment:
Finally, the large current account deficit of the United States, in particular, requires substantial flows of foreign financing. As I have discussed today, the underlying sources of the U.S. current account deficit appear to be medium-term or even long-term in nature, suggesting that the situation will eventually begin to improve, although a return to approximate balance may take some time. Fundamentally, I see no reason why the whole process should not proceed smoothly. However, the risk of a disorderly adjustment in financial markets always exists, and the appropriately conservative approach for policymakers is to be on guard for any such developments.
"It follows that the country's current account deficit equals the excess of its investment over its saving."
Is he serious? This is just so wrong, it's hard to know where to start.
Doesn't he understand that just because money is spent doesn't mean it's spent as capital investment?
You could surely reality check this by assessing levels of capital investment and seeing how they've followed the deficit. Would anyone be silly enough to bet that there has been an explosion of capital investment to match the US trade deficit?
It is economically nonsensical because it effectively assumes that US spending is all related to capital expenditures to productive capital stock (which is not true). Actually US capital expenditures (in last few years) related to productive stock are roughly equal to amount needed to keep it in current level (i.e. to stay afloat). The US current account decifit is mostly due excessive spending to consumption and residential (effectively non-productive as far as import/export is concerned) construction.
It is also good to remember that US is not terribly good in attracting foreign portfolio investment (US investments are larger to abroad than foreign investment to US) and large current account decifit is due foreigners putting their money into US debt instruments.
Thus the trade decifits and current account decifits are not due any great surge of capital investment to US as engine of World economy.
Here is some data to illustrate it:
US FDI flows 1995-2004
Home made with data from UNCTAD FDI Database Source: Bureau of Economic Analysis, U.S. Department of Commerce.
About the poor quality of the picture, please, be indulgent: it's the first time I use Photobucket to upload a graph I made... "Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
Thanks for the source on FDI. I've longed wanted such a source to build a graph with French inbound FDI compared to others, to show that despite its 'horrible' policies, it is an attractive place to invest in. In the long run, we're all dead. John Maynard Keynes
I've commented below to the effect that IMO your comment and others are defining the capital account in balance of payments as "capital expenditures to productive capital stock", in your words. The capital account in fact includes the US debt instruments that you mention above, as well as investment in securities.
But what is minus on the current account is plus on the capital accounts--a tautology as he says.
I think this is only true in the aggregate -- meaning in the entire global economy. If you were to add up every country's current-accounts deficit, it would be equal to their capital-accounts surpluses, I believe. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
