Evaluating Causes, Cures and Global Imbalances
6. The sustainability of the deﬁcit HOW MUCH OF A THREAT? In the previous chapter we said that the sustainability of a current account deﬁcit for any country depends ultimately on what is done with the borrowings or realization of assets. No nation (or grouping of citizens) can borrow indeﬁnitely or sell oﬀ assets without limit to consume more than it produces, although it can do so for some, perhaps considerable, time. In the words of Joan Robinson (1973): The deﬁcit country is absorbing more, taking consumption and investment together, than its own production; in this sense, its economy is drawing on savings made for it abroad. In return, it has a permanent obligation to pay interest or proﬁts to the lender. Whether this is a good bargain or not depends on the nature of the use to which the funds are put. If they merely permit an excess of consumption over production, the economy is on the road to ruin. The United States is not exempt from such admonitions, but the role of the US dollar as international money does mean that the constraints that it faces are very diﬀerent from those of other countries. Nowhere is this more evident than in the investment income ﬂows and the external balance sheet. Indeed, for all countries the major implication of growing ﬁnancial integration and the international ﬁnancial laissez-faire framework is that the examination of a current account deﬁcit, and its ramiﬁcations and...
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