Monday, April 19, 2010

Record US Capital Surplus

The title of this post is just another way of saying we have a record trade deficit, just without the fear. That's how baby-faced economist Benjamin Powell explains it:
Put simply, if you buy something from a foreigner, you must pay him—a debit is entered. Then the foreigner must somehow spend or save your payment—a credit is entered. When all credits and debits are added up, the entire accounting system must balance: The current account balance plus the capital account balance must sum to zero. Hence, a current account (trade) deficit implies a capital account surplus.

A trade deficit reflects the fact that we buy more goods and services from abroad than we sell to foreigners. Foreigners take the earnings they receive from our spending (minus the goods and services they buy from us) and invest that sum in the U.S. The U.S. has a wealth of investment opportunities, but we have a low rate of domestic saving, so lots of investments in the U.S. wouldn't get funded if foreigners weren't willing to supply us with their savings.
More investment means more production, which is undoubtedly very good for a nation. Although I would like to see our nation's personal and public savings increase, it's good that other nations see us as such a reliable place to invest. We shouldn't fear countries like China loaning to America. A more reasonable, but still unlikely, fear should come from China, that we won't pay them back.

No comments:

Post a Comment

You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.