Meaning what, exactly.

Also, I think that any contraction in imports are going to eventually made up for by purchases of capital assets. Lots of real estate for sale that non-US residents are going to be interested in……

AC wrote:

“If neither official nor private buyers of US assets emerge, the US current account would have to contract quickly”. But how would this happen? Most of the CA deficit comes from goods trade deficit. So the US would buy a lot less from abroad? What would force people to buy less foreign goods (less goods at all)?

There are two possible ways:

A) Internal recession in the US.

B) Dollar plunge, whereby prices of foreign goods become prohibitive.

As far as importing things we don’t produce. This will continue. Oil is an example of something we will never likely produce enough domestically. The surplus items will offset the deficit items, so in net, things will balance out. It seems unlikely given our huge deficits, but, eventually prices will reach a point where we will import less and produce more. There will be no other option.

Again, I think things will eventually return to normal. The world relies too much on US consumption in the sohrt term to allow a continuous drop in the dollar. Long term, I think the US will eventually fall from economic grace.

There are two possible ways:

A) Internal recession in the US.

B) Dollar plunge, whereby prices of foreign goods become prohibitive.

OK, but there are a lot of things the US does not produce anymore. Do you think these industries will go back to the USA? And if they will, it will take some time. What will happen in the meantime, while the US is not financed adequatly from abroad? What will be the signs? We should already see these signs, because as Brad said, in q3 the foreign financing of the CA deficit was lower than needed. Who made up the rest?

The way it would happen in via inflation in imported goods in conjunction with a falling dollar. When imports cost more, we buy fewer imports and buy more domestic substitutes. This continues until the ledger balances out.

I personally think this is a short term abberation. China is clearly scared to death of the Yuan appreciating too much against the dollar. Regardless of what a few officials say, actions speak louder than words. I think Japan is scared too. The Saudis like the stability a US presence in the middle east has. I know things are unstable, but compared to what would happen if the US pulled out, the current situation is nothing. It’s no suprise that private flows have slowed, with the mortgage scares and all, but this will more likely be replaced with more official inflows.

I think in a few months, everything will be back to normal and the dollar will approach 80 again.

Having read your analyses off and on, I wonder if the more reliable anchor is your various estimates of trend growth in current accounts and reserve positions, with the TIC data adding some (less reliable) colour to the likely composition of the estimated flows by source.