As Brad Delong notes, the big difference between the United States and Australia is that the United States has a trade and transfers deficit of close to 7% of GDP. That implies – assuming the stock of US dark matter doesn’t grow – that the US external debt to GDP ratio (really the US net international investment position to GDP ratio) will rise over time.
Australia’s current account deficit is comparable to that of the United States. But – see John Quiggin — its trade deficit is far smaller. That is at it must be: Australia has to pay interest on all its accumulated debt. The basic rule of thumb is that if you have lots of debt and your economy is growing, you can borrow to pay interest on your external debt. But you cannot borrow both to pay interest and run a trade deficit.
Indeed, if the US wants its net debt to stabilize at Australia’s levels, it probably needs to start the adjustment process now.
In the written testimony I submitted for the record at the recent JEC hearing I provided a lot of the details behind my analysis of the US balance of payments data – including my latest estimates of 2005 global reserve growth and the role central banks have played in the financing of the US current account deficit. One my charts showing the evolution of the US net international investment position in the “no adjustment” and “fast adjustment” scenarios i laid out in a post earlier this week.
That chart – reproduced here – shows that the US net international investment position would stabilize at around 60% of US GDP if the US trade deficit started to shrink steadily in 2007 and basically disappeared by 2017 or so.
The NIIP to GDP ration in this chart is a probably a bit high. I didn’t adjust for valuation gains from the dollar falls likely to accompany the adjustment path that brings the trade deficit down. But it gives some sense of the likely dynamics.