Sunday, 17 May 2009

Deficient thinking

A nice Don Boudreaux letter sent to the Wall Street Journal on a point that economics professors should know better about:
University of Massachusetts economics professor Ronald Olive asserts that "When a country runs a current account deficit it must incur liabilities, that is, borrow or run down its foreign assets, or do both" (Letters, 15 May).

This assertion is simply untrue. If Mr. Olive spends $500 on a bottle of Chateau Latour and the owner of that French chateau then holds those dollars as cash, or uses them to buy dollar-denominated equities or real estate, America's current-account deficit rises without any corresponding increase in Americans' indebtedness or any reduction in Americans' holdings of foreign assets.

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