OOPS!
See the article in full WITH charts!
http://www.mises.org/story/1955
This thread will skyrocket to ten or so comments. Too many big words.
Running a capital account deficit isn't a problem in itself. The problem is that as more countries use dollars in their central bank reserves, general trust in the value of the dollar has to go down given its increased supply. At that point, the dollar becomes vulnerable to speculation on the foreign exchange markets, leading to possible devaluation. Irrational psychology can have just as big an effect in this situation as well-considered economic logic.
This isn't cluelessness; this is what happened to the United States in January-March 1968, and is one of the reasons LBJ decided to stop escalation in Vietnam as well as Great Society social spending.
The biggest saving grace of any debt or deficit the United States runs, is that these are in dollars, our own currency. That's much better, than, say, the typical third world country where the country's debt is also in dollars, but the local money is pesos, bolivars, suns, moons, stars, or sea shells.
Good thread bump
Ping for later.
""Japan and Germany, for example, are "chronic" capital exporters, meaning that the amount of assets they acquire abroad exceeds foreign demand for Japanese and German assets""
Yet some here think that lack of demand for assets in foreign countries is somehow proof of american economic weakness
just ask yourself why arent thy investing i ntheir own countries???
It is no coincidence that the US trade deficit really began to go negative right after Reagan's 1981 tax cuts...cuts in taxes on capital, thus raise the rate of return to capital in the USA...ironically it is Paul Craig Roberts who is responsible for americans huge trade deficit as he was the designer of reaganomics...that was then, this is now and Paul Craig Roberts currently currently inhabits a padded room
this also explains the folly of the gold bugs...if we went back on the gold, our standard of living would decline substantially...with a deficit we would have gold outflows, this would cause a sharp contraction in the money supply and thus lower employment and output...the gold standard would thus reduce US GDP by at least 6% and probably more like 10%
Great article. Thanks.