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Quotation of the Day…
Posted By Don Boudreaux On December 30, 2013 @ 7:30 am In Balance of Payments,Myths and Fallacies,Trade | Comments Disabled
… is from page 50 of Geoffrey Wood’s useful 2002 collection, Fifty Economic Fallacies Exposed :
A striking example occurred in the United States. On average, that country ran a deficit on current account from the last quarter of the 19th century into the first decade of the 20th. It did so because there was a tremendous demand for funds to invest. Population, industry, and agriculture were all expanding westward. The funds were lent from the residents of European countries, where the expected rate of return on investment was on average lower than in the United States. No one – at any rate, no one I know of – has claimed that the decline of the US set in with that foreign borrowing. It was used productively. The balance-of-payments deficit it engendered was in no way symptomatic of a problem.
Yep. I add only that a country’s current-account deficit rises not only as a result of its citizens borrowing more funds from foreigners, but also as a result of foreigners making more equity and real-estate investments in that country – these latter transactions involving no borrowing of funds by citizens of the country from foreigners.
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