Today’s topic is U.S. current account deficit, which is a net inflow of capital that offsets the trade imbalance. In short, as you probably know, we are consuming more than producing and cover the rest by borrowing. This is how it looks:

The necessary readings are:

The first paper is discussing the fact that the reasons of CA deficit are not the “engineered” surplus in developing countries, as B. Bernanke beleives, but more the following reasons:

  1. The role that U.S. is playing in infrastructure and export needs of developing countries
  2. The U.S. military might that is aimed to enforce its economic policies
  3. The U.S. housing bubble, which triggers the wealth effect and increases consumption

The second paper, stolen from the working desk of U.S. congressmen, is discussing the impossibility of the CA deficit to run forever and the scenarios of its unwinding. Please read the paper for details, but in short we are talking about the constant decline of the dollar for the many years to come.

Let me say, as usual: thank you Mr. Greenspan for all this!