Why Has Our Current Account Balance Shrunk?

There’s an interesting article at Bloomberg on the remarkable decline in the U. S.’s current account balance over the last eight years, from more than $800 billion to just over $300 billion. Just to refresh your memory the “current account balance” is defined as the balance of trade plus net factor income (earnings on foreign investments minus payments made to foreign investors) plus cash transfers.

As it turns out the main reasons for the change are 1) a substantial increase in the services we sell to other countries and 2) the dividend and interest payments we receive from the rest of the world relative to the dividend and interest we pay.

Here’s the kicker:

Americans tend to buy high-paying equity stakes while overseas investors buy debt, often low-yielding U.S. Treasury bonds.

In order to maintain their mercantilist trade policies, trading partners like Germany, China, Japan, and South Korea must either purchase U. S. dollars or hold dollar-denominated assets. When their appetite for risk is extremely low, they hold Treasuries. Mostly, they’ve elected to purchase Treasuries and as long as Treasuries continue to pay abysmally low rates our net factor income will continue to look pretty darned good.

However, that strategy has implications for savers here and sectors that depend on the interest earned on Treasuries, e.g. insurance. The strategy is destroying them so our improved current account balance isn’t all skittles and beer.

2 comments… add one

  • ...

    Paging Drew. Paging Drew. We’re ready for your “told you”s on the WHOCABS thread.

  • Guarneri

    Who cares about “I told you so” ice. Its not a parlor game. Its the real lives and welfare of real people.

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