Borrowed Savings A nation’s capital account is the other side of the current account coin. Basically, it measures the difference between saving and investment. When a nation’s personal income, business net income, and government revenue (federal, state, and local) are insufficient to fund its consumer spending, business investment, and government spending, then it must attract foreign capital to cover the difference.
This creates a capital account surplus, which means a country sells more of its capital assets (for example, government bonds or shares of American companies) to foreign countries than it buys of theirs.
Countries like the United States that have current account deficits necessarily have capital account surpluses of exactly the same magnitude; the two accounts must balance. Viewed from one angle, the United States must sell some of its assets to pay for the fact that it imports more goods than it exports.
RISING FAST: The United States’ current account balance, which includes trade and investment flows, is running a growing deficit that represents more than 6 percent of GDP.Indebted to the World Viewed from another angle, we have a trade deficit because we are spending more than our income and have to import savings to close that gap.
To some, this all seems like a virtuous circle: (a) the United States has not been saving nearly enough to finance its consumption, investment, and government spending; (b) investors in other countries like to invest in our country; so (c) we borrow the needed savings from abroad, thereby running a capital account surplus and a trade deficit.
Over the last several years, however, private investors have mostly pulled back. The trade deficit remains unchanged, though, because a second virtuous circle appeared. First Japan, then China (along with other economies that concentrate on exports), wanted the United States to continue importing their manufactured goods, so they worked to keep their currencies from appreciating against the dollar. Their central banks bought dollar-denominated assets, mainly U.S. Treasury securities.
Now, the very notion that developing countries would lend their savings to finance spending in the most developed nation on earth ought to give us pause. It is unprecedented. And, it can’t continue forever.