Thank you for your wonderful articles. I have always enjoyed your work, including your videos. I found them to be very informative and insightful.
I think the chart you showed in this article is misleading, though. The only way for the inflow of foreign investment to be the exact mirror of the current account is to include all the goods and services the US purchased from other countries.
For example, if the US pays Canada 100 million USD for some maple syrup, then the US current account is debited by $100 mil, but the foreign investment account is accrued by $100 mil.
If the goods and services purchased from other countries are not counted, then there is no way the two accounts are mirror images. For example, in the case above, Canada can hoard the $100 mil it got from the US and do nothing. They do not have any obligation to reinvest that $100 mil back into the US.
Appreciate the kind words and the thoughtful comment!
In your example, the balance of payments still holds because those dollars don’t just vanish. Even if Canada decides to “hoard” the $100M, that money has to go somewhere—it might sit in a U.S. bank (where it funds bank loans) or it might be used to buy U.S. Treasuries (a form of investment).
That said, you made a great point, which is that the current account and capital/financial account don’t have to balance on bilateral basis over a given period of time (they do have to balance on a global basis).
For instance, Canada might not want to hold onto U.S. dollars or buy U.S. assets, so they could exchange them for another currency, like yen. That would shift the ownership—the new holder of those dollars (a Japanese investor, for example) will then do something with them, whether that’s buying U.S. assets or purchasing U.S. goods and services.
In any case, the dollars are always used— either directly or indirectly. Unless we’re talking about physical cash stuffed under a mattress (which is rare in international trade), those dollars will always flow back into the system in some form.
Thank you for your wonderful articles. I have always enjoyed your work, including your videos. I found them to be very informative and insightful.
I think the chart you showed in this article is misleading, though. The only way for the inflow of foreign investment to be the exact mirror of the current account is to include all the goods and services the US purchased from other countries.
For example, if the US pays Canada 100 million USD for some maple syrup, then the US current account is debited by $100 mil, but the foreign investment account is accrued by $100 mil.
If the goods and services purchased from other countries are not counted, then there is no way the two accounts are mirror images. For example, in the case above, Canada can hoard the $100 mil it got from the US and do nothing. They do not have any obligation to reinvest that $100 mil back into the US.
Appreciate the kind words and the thoughtful comment!
In your example, the balance of payments still holds because those dollars don’t just vanish. Even if Canada decides to “hoard” the $100M, that money has to go somewhere—it might sit in a U.S. bank (where it funds bank loans) or it might be used to buy U.S. Treasuries (a form of investment).
That said, you made a great point, which is that the current account and capital/financial account don’t have to balance on bilateral basis over a given period of time (they do have to balance on a global basis).
For instance, Canada might not want to hold onto U.S. dollars or buy U.S. assets, so they could exchange them for another currency, like yen. That would shift the ownership—the new holder of those dollars (a Japanese investor, for example) will then do something with them, whether that’s buying U.S. assets or purchasing U.S. goods and services.
In any case, the dollars are always used— either directly or indirectly. Unless we’re talking about physical cash stuffed under a mattress (which is rare in international trade), those dollars will always flow back into the system in some form.