Friday, September 23, 2005

Current Account Deficits

There has been a bout of recent posts from right wing bloggers stressing about our current account deficit. The nice analysis from Farrar was this: "Now let's debunk Dr Cullen's logic. If one actually gives NZers some of their own money back to them, this will allow people to save more!". Well, it also gives them more money to spend... and rich people tend by buy expensive luxury goods from overseas.

Regardless, that's not important. What is important is that current account deficits are not bad, for two reasons. Firstly, and most importantly, they don't exist. When New Zealanders buy, say, $1000 worth of goods from overseas, we have bought goods, and the overseas sellers have bought our money. An economy as a whole cannot bleed currency - it can bleed currency value, but current account deficits would have us believe that our economy's cash will simply dry up. It won't.

Secondly, and this is how we get current account deficit figures, is in various areas. Trade of merchandise may be negative, while service trade may be positive. Regardless, current account deficits are just the formulation of the expected effect on the economy in the future. If a country has large current account deficits, it simply means that its dollar is too high. A high dollar is generally good for importers and bad for exporters. A high current account deficit simply means that New Zealand's dollar will be weakened, meaning that the economy stabilises. It's simply the marking realigning with equilibrium.


Update: I didn't make it clear enough above that the surpluses in other areas of which I spoke was of course the capital account. A current account deficit just means that as a country we are importing capital. Get over it.

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