On Mon, 6 Sep 1999, Paul Cockshott wrote:
> Date: Mon, 06 Sep 1999 10:13:13 +0100
> From: Paul Cockshott <email@example.com>
> Reply-To: firstname.lastname@example.org
> To: email@example.com, firstname.lastname@example.org
> Subject: [OPE-L:1130] monetary inflows versus capital accumulation
> I have a question to Fred.
> Are the current monetary inflows to the USA from abroad
> greater or less than the net us capital accumulation?
> What I want to know is whether the inflows are funding
> accumulation or just an increase in indebtedness.
> Let D be the deficit on us visible and invisible trade, including
> net payments of interest and dividends across US national
> Let S be net saving out of income of the US household sector.
> Let C be net capital accumulation by US industrial and
> commercial companies.
> I want to know if
> (C-S) < D
> If it is then the monetary inflow is in the long term unsustainable.
> If (C-S) >= D then the monetary inflow could continue so long
> as this holds, since the paper securities so purchased are backed
> by real capital goods.
Thanks very much to Paul for his interesting questions and to Allin for
his illuminating answers. I have a few additional comments.
1. With respect to Paul's question about the extent to which the inflow
of foreign capital is being invested:
Allin is correct about the current magnitudes of US private nonresidential
investment (roughly $1000b) and the net inflow of foreign capital (roughly
$300b). For the 1990s as a whole, the net inflow of foreign capital has
been about 20% of private nonresidential investment. One could argue that
almost all of this foreign capital is being invested one way or another,
either directly in business firms or indirectly in government bonds that
frees up other funds that can be invested.
I think that investment in the US would have been significantly less in
the 1990s without this inflow of foreign capital. The increase in the
ratio of investment spending to GDP (that Allin mentioned) would probably
not have occurred with this inflow of foreign capital. And hence the rate
of growth in the US economy would have been less without this inflow of
2. Now, with respect to Paul's other question: is this sustainable?
Paul seems to suggest that, if the foreign capital is being invested, then
this is sustainable (presumably because the investment will generate the
profits with which to make the interest payments in the future). So,
according to Paul's criterion, this inflow of foreign capital seems to be
sustainable, since it seems to be true that at least a significant portion
of this foreign capital is indeed invested.
But the problem is that, since the current account deficit will continue
to increase in the years ahead, the net inflow of foreign capital will
also have to continue to increase (or the dollar will have to decline).
And a vicious circle has set in that will probably increase the current
account deficit significantly in the years ahead (without a decline of the
dollar or a US recession): this year's increase in the current account
deficit further increases the foreign debt, which next year will increase
the foreign interest payments and hence the current account deficit still
further, etc., etc.
Wynne Godley (of the Levy Institute) has estimated in a recent paper
"Seven Unsustainable Balances") that, if the US economy were to continue
to grow 2% a year for the next five years, then the US foreign debt as a
percentage of US GDP would more than double from roughly 12% today to
roughly 25% in 2003. And by this time, the vicious circle described above
would be so firmly entrenched that the foreign debt would escalate even
faster after that - reaching 45% of GDP by 2008. Godley concludes: "This
process is clearly unsustainable and will eventually have to be checked,
preferrably before an exchange rate crisis forces the issue."
I think that at some point in the not too distant future, if a US
recession does not happen first, foreign investors will begin to see that
the dollar will have to decline eventually in order to reduce this
escalating current account deficit, and they will be less willing to
provide the foreign capital necessary to avoid a devaluation of the
dollar. At this point, the dollar will start to decline more rapidly,
more foreign capital will flee, and we will end up with a substantial
devaluation of the dollar. This devaluation of the dollar will, in turn,
cause the stock market to crash, and with it consumer spending and the US
economy in general, as I have already discussed.
Paul (and others): what do you think?
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