Obvious point number one: The adjustment process that brings the US external deficit down could be smooth, or not-so-smooth. We don't know.
No country as big as the US has run a deficit this large for a sustained period of time off an export base as small as that of the US. New York Federal Reserve President Geithner:
"The plausible outcomes range from the gradual and benign to the more precipitous and damaging"
Obvious point number two: Even if modern financial technology and greater cross-border capital flows allow "greater dispersion" of current account deficits and surpluses globally, a US trade and transfers deficit of 7% is not sustainable forever.
A 7% of GDP trade and transfers deficit implies a rising level of net indebtedness, rising net interest payments and a rising current account deficit.
However, it is not difficult to see that if the deficit continues to run at a level close to 7 percent of GDPâ€”and most forecasts assume it will for some timeâ€”the net international investment position of the United States will deteriorate sharply, U.S. net obligations to the rest of the world will rise to a very substantial share of GDP, and a growing share of U.S. income will have to go to service those obligations. This fact alone suggests that something will have to give eventually, and this raises the interesting question of how these imbalances have persisted on a path that seems unsustainable with so little evidence of rising risk premia.
Obvious point number three: Not all capital flowing into the US comes from private market actors. Geithner:
… these capital inflows into the United States, however, are not solely the result of the decisions of private actors, but reflect official intervention by countries with exchange rate regimes tied to the dollar, including those in Asia and the major oil exporters.
Research at the Federal Reserve and outside suggests the scale of foreign official accumulation of U.S. assets has put downward pressure on U.S. interest rates, with estimates of the effect ranging from small to quite significant. If this is right, the apparent reduction in real rates is less likely to signal concern over expectations of future growth and future returns on investment, and is more likely to signal the special consequences of these exchange rate arrangements and their effects on private behavior, as well as the increase in international capital mobility.
One observation in the Financial Times: the currency of a country with a trade and transfers/ current account deficit of 7% of GDP is no longer an obvious safe haven in times of rising geopolitical stress and market risk aversion.
On Monday, UBS' risk index rose to its highest level for several months, a trend that tends to support "safe haven" currencies such as the Swiss franc and euro, but undermine the US dollar.
The argument that the dollar is no longer an obvious safe haven is neither conventional wisdom nor obvious now, but it may become conventional wisdom over time. We will see.
Full disclosure: I worked for Mr. Geithner at both the Treasury and the IMF.