>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).
Why must the current account deficit increase with the years ahead?
Is it not possible that the investment projects will result in a reduction
in costs of US production, leading to import substitution and higher
>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.
Whether interest payments rise depends upon the form in which the
non US asset holders hold their assets. If they hold them in the form of
shares in many high tech firms like Microsoft, which pay negligible dividends
then there need not be a proportionate rise in interest payments.
What is the mix of foreign holdings in the US between equity and bonds?
>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.
Suppose however we temporarily ignore the existence of national
borders and just consider this in the form of a classical accumulation
process. One would anticipate that there would be limits to the cycle
of rapid accumulation set by factors such as:
1. the exhaustion of reserves of labour resulting in lower rates
2. The rise in the organic composition of capital.
If either or both of these factors causes the rate of profit to fall
below or close to the discount rate, one would anticipate a slackening
in capital accumulation. The reduced demand both for constant
capital and foreign consumer goods consequent upon this
would then reduce the trade deficit.
>Paul (and others): what do you think?
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