A Little International Economics - Again, Not to Worry about US Trade Deficits

Here are the understandable highlights {with key points in bold from me} from an article in the International Herald Tribune today - U.S. hegemony has a strong foundation: "Would-be Cassandras have found a new threat to U.S. hegemony: overdependence on foreign capital and growing foreign debt."

Despite the pervasiveness of this doomsday prophecy, U.S. hegemony is solidly grounded: It rests on an economy that is continually extending its technological lead, ensuring its continued appeal for foreign investors. The dollar's role as the global monetary standard is not threatened, and the risk to U.S. financial stability posed by large foreign liabilities has been exaggerated. If anything, the world's appetite for U.S. assets bolsters U.S. predominance rather than undermines it.
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The classic doomsayer argument - that growing foreign indebtedness results from too little savings by Americans - neglects the fact that savings and investment are seriously undervalued in U.S. economic accounts. When you include capital gains, 401(k) retirement plans, and home values, U.S. domestic saving is around 20 percent of GDP, the same as in most other developed economies. And when you consider "intangible" investment (like new-product development and design experimentation) as part of total, the supposed increase in consumer spending as a share of GDP turns out to be a statistical artifact.
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Indeed, much of the explanation for chronic current account deficits relates to the U.S. economy's strong fundamentals, not fatal structural flaws. Thanks to strong economic growth reinforced by a bias toward imports and a still overvalued currency, American consumers have tended to spend a disproportionate share of their incomes on imports. More important, with the United States expected to grow faster than Europe and Japan over the next decades and wealth growing rapidly in Asia, foreign private investors and central banks will continue to flock to U.S. financial markets. Asian governments must continue to finance U.S. imports of their manufactured goods, since the United States is their largest market and a major source of inward direct investment. And the spread of information technology to new sectors of the U.S. economy will make a revival of U.S.-bound private capital flows likely as well.
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To be sure, the economy will at some point have to adjust to a decline in the dollar and a rise in interest rates. But these trends will at worst slow the growth of U.S. consumers' standard of living, not undermine the U.S. role as global pacesetter. The dollar will remain dominant in global trade, payments and capital flows, based as it is in a country with safe, well-regulated financial markets. For foreign central banks, U.S. Treasury bonds, government-supported agency bonds and deposits in highly rated banks will remain, for the foreseeable future, the chief sources of liquid reserve assets. And provided U.S. firms maintain their entrepreneurial edge - and despite much anxiety, there is little reason to expect otherwise - global asset managers will continue to want to hold portfolios rich in U.S. corporate stocks and bonds.
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The real threat to U.S. hegemony, then, is not that the sentiments of foreign investors will make foreign debt unsustainable; it is that protectionism and isolationism at home will put an end to the dynamism, openness and flexibility that power the U.S. economy.
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(David H. Levey was formerly managing director of Moody’s Sovereign Ratings Service. Stuart S. Brown is a professor of economics and international relations at Syracuse University.) "

Once again I am saying do not listen to the naysayers worried about US Trade Deficits (yet...) Also if you are into this the entire article is interesting and not very technical.
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