Sustaining the unsustainable

Global investors are worried about many things. Why is America's current-account deficit not one of them?

A few years ago most economists argued that the spectacle of poor countries bankrolling America's deficits was the perverse and unsustainable consequence of American profligacy. Economic theory suggested that capital should flow from rich countries to poor ones, and that America could not increase its foreign borrowing for ever. Empirical studies showed that deficits of more than 5% of GDP caused trouble.
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Since then, economists have vied with each other to overturn this orthodoxy. Indeed, rejecting the conventional wisdom is now itself entirely conventional, as Jeffrey Frankel, an economist at Harvard University, has pointed out
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They point out that emerging economies have been frantically accumulating real assets, such as assembly lines and office towers, but their generation of financial assets has not kept pace. Thanks to weak property rights, fear of expropriation and poor bankruptcy procedures, many newly rich countries are unable to create enough trustworthy claims on their future incomes. Lacking vehicles for saving at home, the thrifty buy assets abroad instead. In China, Mr Caballero argues, this is done indirectly through the state, which buys foreign securities, such as Treasuries, then issues bonds of its own, which are held by Chinese banks, companies and households.