"Unless the trade deficit shrinks, the combination of the trade deficit and the interest and dividend payments to foreigners will grow ever more rapidly"
About this Quote
A country that spends more on foreign goods and services than it earns must finance the gap by borrowing from abroad or selling domestic assets to foreigners. Those transactions create a growing stock of foreign claims on the nation. Interest on debt and dividends on equity do not stand still; they accumulate and compound. If the trade deficit persists, the flow of payments to foreign holders of those claims rises, and the combined outflow of the trade deficit plus income payments accelerates. That is the arithmetic of the external accounts turning into a feedback loop.
The idea sits at the heart of the current account identity: a trade deficit mirrors a shortfall of national saving relative to investment. Sustained dissaving means sustained borrowing from the rest of the world. Over time, the net international investment position deteriorates, and with it the burden of servicing foreign claims. Even if the economy grows, the payment obligations can grow faster unless the trade gap narrows.
Martin Feldstein pressed this point in debates over US policy from the 1980s through the 2000s, when the United States ran large and persistent external deficits. He linked them to the federal budget deficit, the so-called twin deficits, and to a strong dollar that held back exports. His policy prescriptions followed the logic: raise national saving, especially through fiscal consolidation; improve competitiveness so exports expand and imports moderate; allow exchange rates to adjust rather than suppressing them.
The risks of ignoring the dynamic are not only accounting curiosities. Larger external payments drain national income, leave the economy more exposed to swings in global interest rates and investor sentiment, and can force sharper future adjustments through currency depreciation or higher domestic rates. While the United States has at times offset these pressures thanks to its unique financial role, the underlying arithmetic remains. Without narrowing the trade imbalance, the compounding claims of foreigners make the eventual correction more difficult and more costly.
The idea sits at the heart of the current account identity: a trade deficit mirrors a shortfall of national saving relative to investment. Sustained dissaving means sustained borrowing from the rest of the world. Over time, the net international investment position deteriorates, and with it the burden of servicing foreign claims. Even if the economy grows, the payment obligations can grow faster unless the trade gap narrows.
Martin Feldstein pressed this point in debates over US policy from the 1980s through the 2000s, when the United States ran large and persistent external deficits. He linked them to the federal budget deficit, the so-called twin deficits, and to a strong dollar that held back exports. His policy prescriptions followed the logic: raise national saving, especially through fiscal consolidation; improve competitiveness so exports expand and imports moderate; allow exchange rates to adjust rather than suppressing them.
The risks of ignoring the dynamic are not only accounting curiosities. Larger external payments drain national income, leave the economy more exposed to swings in global interest rates and investor sentiment, and can force sharper future adjustments through currency depreciation or higher domestic rates. While the United States has at times offset these pressures thanks to its unique financial role, the underlying arithmetic remains. Without narrowing the trade imbalance, the compounding claims of foreigners make the eventual correction more difficult and more costly.
Quote Details
| Topic | Money |
|---|
More Quotes by Martin
Add to List
