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Accounting for the Capital Account

Protectionists worry a lot about the trade deficit – that is, the current-account deficit. In response, pro-consumer economists point out that the larger the current-account deficit, the larger the capital-account surplus; therefore, a growing current-account deficit for the United States means increasing foreign investment in the U.S.

One protectionist reply to the pro-consumer economist is that most of the dollars spent by foreigners on U.S. assets are for existing assets and not for new investment. Relatedly (goes this reply) an increasing capital-account surplus means that “we” Americans are transferring “our” assets to foreigners. (A reply making these points came to me in a private e-mail that I’m not at liberty to share.)

This reply is irrelevant and mistaken.

Consider that nearly every dollar spent on stock exchanges such as the NYSE and the NASDAQ is for existing assets. Mr. Jones buys X shares of Microsoft stock from Mr. Smith. If investors are optimistic about Microsoft’s future, they bid up the prices they are willing to pay for its shares. As a result, Microsoft will be better able, if and when it wishes, to issue new stock and to float more debt. That is, a higher price of Microsoft stock means that Microsoft can more easily fund R&D, build new factories, expand its output.

Moreover, whether they’re buying existing assets or building brand-spanking new ones in the U.S., the fact remains that investors (many of whom happen to be foreigners) are investing heavily in America – a fact that is irreconcilable with protectionists’ doomsday scenario of an America going to the dogs.

Finally, how utterly misleading is the term “our assets” when used to describe assets owned by others? A thousand shares of General Electric owned by Warren Buffett are no more “mine” or those of any other American, except Buffett himself, than they would be if Buffett sells them to a Japanese or a Sudanese.


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