International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

3
Deficits and Imbalances

KNUT ANTON MORK

Among the Western nations, the United States was virtually the only one to benefit economically from both World Wars. Moreover, its vast resources enabled it to become the supreme source of financing of its allies' war efforts. As a consequence, it came out of World War II as the world's undisputed largest creditor nation. Much of the country's foreign holdings was invested in overseas production facilities by U.S. corporations, which further strengthened the country's position as the world's leading economic power.

During the last 20 years, and particularly the last decade, this situation has been turned around abruptly. Via a series of large and seemingly unending deficits in merchandise trade, the net flow of capital has turned inward into the United States as opposed to the previous outward flow of investments. This flow was counteracted somewhat and for some time by the return on the substantial foreign investments that had been made in previous years. This return is classified accounting-wise as exports of capital services. Thus, when merchandise trade and trade in services (as well as unilateral transfers) are added together in the current-account balance, the deficits have been slightly more modest than for merchandise trade. By now, however, the steady inflow of foreign capital needed to finance the persistent deficits has resulted in a total of foreign holdings in the United States that exceeds U.S. holdings abroad. The result obviously is that the capital-services contribution to the current account is being reversed. According to some statistics, the United States already has become the world's largest debtor nation. These statistics have been challenged, and for good reasons, on the grounds that they value U.S. foreign holdings at their original acquisition value and thus ignore important capital gains. However, this is only a temporary comfort because, at the current deficit

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