For release: April 10, 2001
Contact: Joe Elstner, (314) 444-8902; Charles B. Henderson, (314) 444-8311

U.S. Current Account Deficit Reflects Healthy, Growing Economy, Says St. Louis Fed's Poole

Link to speech

DYERSBURG, Tenn. -- During 2000, U.S. payments to other countries exceeded receipts -- a "current account deficit" -- by $435 billion. Is that a bad thing?

Not when you look at what's behind that figure, says Bill Poole, Federal Reserve Bank of St. Louis president. Poole's point was included in remarks made to an audience of business and community leaders in the Dyersburg area.

The flip side of the current account deficit is an identical surplus in the U.S. capital and financial account -- a key accounting principle, said Poole. The surplus, he said, results largely from a continuing strong inflow of investment dollars from citizens, corporations and others in foreign countries to the U.S.

If that strong inflow of foreign investment dollars were sharply reversed, would that harm the U.S. economy? Possibly, said Poole, adding, however, that he sees that development as unlikely. "To date, my conclusion continues to be that the U.S. investment climate remains robust, perhaps surprisingly so given the extent of the stock market decline. Weaker near-term prospects seem not to have dimmed the long-run outlook of robust growth."

Poole noted that the dollar remains strong on foreign exchange markets. "It does not appear to me that the U.S. capital and financial account surplus is about to decline sharply. And that is good news rather than bad news," he said.

Poole said that it's common to look at an increasing current account deficit as bad. "One reason for such an interpretation is psychological," he noted. "We tend to view deficits as bad and surpluses as good. The error of this view is that if the current account deficit is bad, so also is the capital and financial account surplus."

Poole said it's true that not all concerns about current account deficits are strictly psychological. "Some worry that, if foreign nations suddenly attempted to liquidate their assets in the U.S., they might precipitate a financial crisis here. Such actions, however, are unlikely because foreign investors would be driving down their own wealth."

As to concerns about the sustainability of substantial borrowing from abroad, Poole said that "markets will provide clear signals about that through higher interest rates, lower exchange rates and reduced credit availability. At this point, there are no signals indicating such a problem."

Poole concluded that the capital and financial account drives the current account. "The large U.S. current account deficit in recent years is the result of a large capital and financial account surplus," he said. "These annual surpluses reflect a healthy and growing U.S. economy that has provided an excellent environment for investment."

Poole said that "if the U.S. economy weakens, then it is reasonable to expect these current account deficits to shrink. However, as long as the fundamentals of the U.S. economy do not deteriorate rapidly, the prospects of a financial crisis are very slim."

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