Yet More on the Sustainability of the U.S. Current Account

The extremely sharp John Kitchin has an optimistic paper giving his heterodox view of the sustainability of the U.S. current-account deficit:

http://users.starpower.net/jkitch/ShareShrewd.pdf Large and increasing U.S. international deficits and debt have led to an apparent conventional wisdom that the United States will pay an increasing share of total U.S. output over time to service the growing international debt. This paper presents a detailed framework and analysis of the issues surrounding the question of whether the U.S. is, in fact, on track to be a society of “sharecroppers” or rather is actually more consistent with being a society of “shrewd capitalists.”

The base scenario projects that the U.S. likely will experience continued growth in its net international debt position, but with a relatively minor cost of servicing that debt in terms of the associated net international income flows. Alternative scenarios based on other analysts’ projections also are presented to illustrate the reliability of the modeling framework and to show how alternative future paths for key variables affect the outcomes. The detailed analysis provides insights into how the underlying relationships affect the final result. In particular, valuation changes – and notably valuation changes beyond those resulting from exchange rate changes – have played, and likely will continue to play, a large role in the determination of the U.S. net international investment position.

In general, the results indicate that there is a higher likelihood for the U.S. international financial position to be “sustainable” and manageable – even if we were to observe persisting trade deficits – than is typically considered to be the case.

Memo to Self: I should see if there's broad interest on trying to lure John out here for the International Seminar in the fall...