… is from page 2 my former Mercatus Center colleague Dan Griswold’s April 2023 paper with Andreas Freytag, “Balance of Trade, Balance of Power: How the Trade Deficit Reflects U.S. Influence in the World“:
The United States can only run a persistent deficit in its current account because it runs an equally persistent surplus in the financial account, which measures the flow of capital across the border. More investment flows into the United States each year than flows out, on net, in large part because the United States remains a safe and profitable haven for the world’s savings. The investment, in turn, fuels growth and job creation.
DBx: It remains a mystery why we Americans should interpret foreigners’ eagerness to acquire and hold dollar-denominated assets as a sign either of foreigners’ unfairness toward us (Do you act unfairly toward your bank by depositing money in it?) or of our economic decline (Do you invest in institutions that you believe are declining?). Also mysterious is why we Americans should fret about the consequences of these investments. (Are you made poorer when, say, your employer invests in worker training for you, or when the factory or the retail store across town are upgraded?)
…..
The figure here shows the accounting reality that a deficit in the current account is always exactly matched by a surplus in the financial – sometimes call “capital” – account. This reality is important yet typically ignored by the many people who wring their hands over America’s trade deficit. Yet this figure misleads when its creator writes that “The country is using financial inflows to finance consumption of imports and investment.” The author of this line can be forgiven given that this manner of thinking about financial-account surpluses is so very common. But what here is common is also wrong.
First, to write of “financing consumption” of investment is obviously misleading. Investment isn’t consumption; an increase in investment requires a reduction in consumption. Second and more fundamentally, nothing is done by “the country.” International commercial transactions are carried out by flesh-and-blood individuals, each pursuing his or her own goals according to his or her own plans. The outcomes recorded on the current and financial accounts aren’t the results of unitary action by “the country” or by the government – a fact for which we should be thankful.
Third, and no less fundamentally, much of the domestic investment that is funded with capital inflows is done not only not by “the country,” but not even by fellow citizens; it is done by foreigners. And much of this investment would simply never occur were it not for foreigners conceiving of its possibility and potential, and having the creativity and gumption to carry it out on our shores. Put differently – and contrary to the implication of standard, textbook discussions of the balance of payments – much of this foreign investment in America would not be done by Americans if only Americans saved more.
