The Current Account Deficit in a Globalized World

Even if the current administration wants to call the Current Account Deficit a Surplus, renaming something doe not alter reality. That is what is amusing about this Dubai port deal fiasco. The Democrats are wanting to build up their National Security credentials, while Republicans are increasingly nervous that their re-election prospects are getting affected. I still think the Dubai based company should be allowed to buyout the stake of the British company: in a globalized world, capital needs to be allowed to flow freely. Brad Setser does an over-simplified, but illustrative, back of the envelope calculation:

The 2006 US current account deficit looks to be a bit under $1 trillion. $1 trillion sounds big, but remember, the annualized fourth quarter current account deficit will almost certainly be close to $900 b. Continued strong consumption growth suggests that the trade deficit is still trending up, and in 2006, rising interest rates are set to push the income balance into negative territory.

And if US companies want to invest abroad and American investors want to buy foreign securities (and they do - just look at how Brazil's equity markets have performed in 2006?), the US needs to attract inflows of over $1 trillion.

So it is not at all unreasonable to say that financing the US current account deficit requires that the US raise $20 billion a week, whether by selling debt, selling stocks or selling off real US assets. 52 * $20b = $1040.

That is equal to selling one Unocal a week to China (CNOOC was willing to pay $20 billion). Or selling three companies the size of P&O to the Emirates a week.

... Moreover, if foreigners who already hold dollar-denominated bonds ever decided they wanted to shift into equities, the potential sale of physical US assets would be even larger.

So far the US has financed its deficits with debt - and debt doesn't carry with it the right of control. Though countries that are hooked on debt do sometimes find that their creditors have a bit of influence over their policies. But fundamentally, there is no way the US can sustain $1 trillion deficits - the 2006 deficit is not going away in 2007 or 2008 barring a catastrophe, at best, the deficit won't keep getting bigger - without selling off large pieces of itself to the rest of the world.

Actually, on this issue, the U.S. has a pretty decent record compared to the European countries. The French goverment in particular has a tendency to intervene to help fight off foreign takeovers: check here and here. Unlike the E.U., I do not really want the U.S. to send the signal that gloablization is fine, so long as we remain the main benificiaries