One important cause of our recent economic prosperity has been the perpetual deficit in our international balance of payments. We routinely spend a few billion dollars more abroad for goods and services each month than other nations spend here.
What has made this possible is that other nations have been consistently taking the money they earn from us and other countries and investing them right back in the United States.
We are consequently getting back more in foreign direct investment than were bleeding away in trade. That explains why the dollar has remained so strong even while we continue spending so many more millions abroad than we earn.
Can it last? Will the laws of economics reassert themselves, making the dollar grow weaker, foreign goods more expensive, inflationary pressures less modest, and interest rates higher as we try to replace the capital that foreigners now provide? .
One worry is that our economic advantages over other nations will slowly disappear.
Another is that other nations will just get tired of investing asking, essentially, What are we saving for anyway? and start buying our goods and services with their dollars instead. Though that sounds good on the surface, it has more ominous significance:
Increased inflationary pressure on our production.
A need for other ways to finance our investment needs.
One third of our national debt is now owed to foreigners. If foreign investors became less willing to hold our debt, Americans would have to hold more. And it would probably take higher interest rates to tempt them to do so.
Finally, a third worry is that nations with big trade surpluses will start wondering if they are really all that good for them, anyway. They end up with stacks of dollars, and then have the problem of what to do with them.
Weve already seen several instances where nations have made foolish investments while trying to find some way of spending their accumulated dollars. Its a hassle, and theyre more and more coming to realize that fact.
So even though things are going along smoothly now, we know for sure that it cant last. The sooner we start increasing our productive capacity, showing more entrepreneurial imagination, making products that compete better with imports, and persuading other nations to relax their restraints on the importation of American goods, the better prepared we will be when foreigners attitudes towards the dollar change.
Mr. Nadler, an American Banker contributuing editor, is a professor of finance at Rutgers University Graduate School of Management in Newark, N.J.
