Everybody would be saved a lot of grief if the United States did not insist on the whole world using USDs as its default currency. Back in the bretton woods days, there was talk of a truly international currency called the bancor that countries can use to trade. I don’t know the feasability or the details, but the U.S. nixed it quick enough.

As I pointed out in my Economists Voice article a while back, there’s nothing unsustainable about a permanent current account deficit, as long as it doesn’t grow faster than GDP. But a permanent trade deficit typically implies an exploding current account deficit, and therefore can’t be sustained.

Dont believe it. Those capitalists (and this economist) are going to put their money WHEREVER IT WILL EARN THE HIGHEST RETURN. That may be the US. It may not. But whether or not the mother firm is US or European or from Bora Bora has no bearing on this. Its a matter of where you can make the most money.

How can anyone, in this age of outsourcing jobs, imagine that it is somehow harder to outsource where to park your money?

On your second point, a nation or individual who adopts this strategy would do well to prepare for the day when they cannot find a willing lender. It usually arrives.

Much if not most of the current account deficit is from government bonds.

Democratic Socialists tend to see the power of the US government to tax as unlimited.
While it isn’t unlimited it is certainly large. It is true that other rising costs
Medicare and SS will be competing for future funds but I would think any
Democratic Socialist would concede that the US could probably tax at least
another 10 – 15 % of GDP. Which means we probably have a
very long way to go before people outside the US are unwilling to buy
govt bonds.

On the private side stock sales and I think stuff like real estate sales(yep looks that way)
hardly pose an undue burden to future generations. Thanks Japanese suckers!

So it is really the US govt that is running most or much of the current account deficit and
it really isn’t clear that a reduction in the US deficit would lead to higher interest rates.
Or is everyone’s memory that short?

Assume that a shift in the private balance would lead to higher interest rates.
Ok how sensitive is personal consumption/investment in the US to interest changes? How sensitive is
business investment to interest rate changes? Is there a big gap between the two that lessens demand? When a shift is made from consumption to investment is there a lag that lessens demand? Is it big spiral? Maybe yes? Maybe no? Are you really that sure?

Also I don’t think it is all that easy as a nation to consume less than it produces and save
the remainder. You really need another nation that wants to consume more and save less. If you
cannot find that partner you just cannot do it. If another nation insists on investing it’s
excess production in your nation it is not at all clear that in any semi-free
system you can prevent them even if you should. Though you might want to either pass
it on to some nation that wants to consume more than it produces(my preference
but remember you need a partner that can make it worth your while).

It really isn’t a clear situation with a clear outcome. But I don’t see how eliminating
the US govt deficit couldn’t help.

What is unique about the dollar is that it’s the currency of the only country in whose economy people have confidence. Where else are you going to park your money? You can’t do it in China because the Chinese won’t let you, Japan is becoming seriously old and Europe is not far behind Japan. The UK is too small, South America has eternal questions about its political stability. There’s not enough gold. etc. etc.

The Chinese (and Japanese) would love to park their money somewhere else; they just don’t see any better alternative.

Maybe this confidence is misplaced; some foreign bankers are certainly getting nervous. But again they don’t see a better alternative.

Lousiest statement I’ve seen on this blog in quite some time. I really hope no one here is naive enough to think that the value of a finished good is the sum of the value of its unrefined parts.

thanks to this fact the US was able to pay for the Iraq war and other goodies, and claim they have the best economy in the world. Is it true or only a temporary situation?
Any other country with such a bonanza would have flourished as well as the US. This will come slowly to and end thanks to the Euro and fatigue from foreigners regarding american silliness.

http://www.nytimes.com/2005/04/09/business/worldbusiness/09yuan.html

“Chinese exports to many other countries rose even faster, while its total imports increased by only 8 percent. Exports to Britain rose this year by 42 percent; to Germany, 44 percent; to Canada and Italy, 59 percent; and to Spain and Indonesia, 75 percent, compared with the period last year.”

Does anyone see this process stopping as long as the Renminbi is not allowed to float?

First the dollar has already plunged, and interest rates haven’t gone anywhere. Secondly, oil is already incredibly expensive (times five or six its low a few years back) and the results have been mild so far. Thirdly, I see very little practical difference between the scenario where investors get sick of financing the American current account deficit and the scenario where Americans voluntarily stop running a current account deficit. In both cases the result looks like the world will fall into a recession – maybe it will be the worst since the Great Depression, who knows at this point? Fourthly, I simply objected to the previous poster’s claim that the societal problem is American, which needs to be discussed. It seems to be a worldwide problem.

But not in hurry, because repatriating business profits of foreign subsidiaries subjects them to US tax. Undistributed profits make capital appreciation, of course, but see fn1.

(Has anyone looked at the impact on the CAD of the repatriation holiday in the most recent tax act? One would expect a spike to the good as backed-up profits get brought onshore.)