The world's a lot different now then it was in the 80's and 90's. We've got the EU organized now to contend with, the Asian Tigers are still on the rise, but most important is that giant China economic machine. Compare the economic growth rates between us and them over the lastten years.
"The dollar, on net, has declined more than 10 percent since early 2002. Inflation and inflation premiums embedded in long-term interest rates--the typical symptoms of a weak currency--appeared subdued, and the vast international savings transfer to finance U.S. investment had occurred without measurable disruption to international financial markets. Two years later, little has changed except that our current account deficit has grown still larger. Most policy makers marvel at the seeming ease with which the United States continues to finance its current account deficit.
Of course, deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely. At some point, foreign investors will balk at a growing concentration of claims against U.S. residents, even if rates of return on investment in the United States remain competitively high, and will begin to alter their portfolios. In addition, efforts by U.S. residents to address their domestic imbalances will presumably contribute to a move away from current account imbalance.
In all instances, a current account balance essentially results from a wide-ranging interactive process that involves the production and allocation of goods, services, and incomes among the residents of a country and those of the rest of the world. The outcome of the process is reflected in the full array of domestic and international product and asset prices, including interest rates.
The rise of the U.S. current account deficit over the past decade appears to have coincided with a pronounced new phase of globalization that is characterized by a major acceleration in U.S. productivity growth and the decline in what economists call home bias. In brief, home bias is the parochial tendency of persons, though faced with comparable or superior foreign opportunities, to invest domestic savings in the home country. The decline in home bias is reflected in savers increasingly reaching across national borders to invest in foreign assets. The rise in U.S. productivity growth attracted much of those savings toward investments in the United States. The greater rates of productivity growth in the United States, compared with still-subdued rates abroad, have apparently engendered corresponding differences in risk-adjusted expected rates of return and hence in the demand for U.S.-based assets.
Home bias was very much in evidence for a half century following World War II. Domestic saving was directed predominantly toward domestic investment. Because the difference between a nation's domestic saving and domestic investment is the near-algebraic equivalent of that nation's current account balance, external imbalances were small. However, starting in the 1990s, home bias began to decline discernibly, the consequence of a dismantling of restrictions on capital flows and the advance of information and communication technologies that has effectively shrunk the time and distance that separate markets around the world. The vast improvements in these technologies have broadened investors' vision to the point that foreign investment appears less risky than it did in earlier times....
However, the component of those broad measures that captures the share of net foreign financing of the balances of individual unconsolidated U.S. economic entities - our current account deficit - has increased from negligible in the early 1990s to more than 6 percent of our GDP today. The acceleration of U.S. productivity, which dates from the mid-1990s, was an important factor in this process....
Regrettably, we do not as yet have a firm grasp of the implications of cross-border financial imbalances. If we did, our forecasting record on the international adjustment process would have been better in recent years. I presume that with time we will learn. In the interim, whatever the significance and possible negative implications of the current account deficit, maintaining economic flexibility, as I have stressed before, may be the most effective initiative to counter such risks....
If the currently disturbing drift toward protectionism is contained and markets remain sufficiently flexible, changing terms of trade, interest rates, asset prices, and exchange rates will cause U.S. saving to rise, reducing the need for foreign finance and reversing the trend of the past decade toward increasing reliance on it. If, however, the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy."
Source: "International imbalances," Remarks by Chairman Alan Greenspan, the Federal Reserve Board, before the Advancing Enterprise Conference, London, Dec. 2, 2005.
http://www.federalreserve.gov/boarddocs/speeches/2005/200512022/default.htm
