The greenback debate is heating up

Admittedly, this post should actually be an update to the post below about the predictions of the dollar in 2006. However, I think that the action going on in the blogs on my blogroll merits that I devote an entry to it.

The debate is sparked by an article in the FT by Martin Feldstein " (...) about the widespread misunderstanding of the nature of capital flows to the US"; (walled for non-subsribers). Obviously ;), New Economist has beat me to it and created an excellent hub for the discussion but my readers should not be left out.

Mr. Feldstein's main point is that the capital inflow to the US is not nearly enough to finance the CA. Theory then tells us that the currency must depreciate in order to compensate.

"This optimistic analysis of the capital inflow is wrong. It results from a misinterpretation of the data provided by the US Treasury in the press release for its monthly Treasury International Capital report."

As reported by Mark Thoma (who actually has a FT subscription) the dollar much would have to depreciate substantially to curb the CA.

"He (Feldstein) believes a 30% decline in the dollar is necessary to get the current account down from 6% of GDP to a more sustainable level of 3% and that much larger changes are possible."

Brad Setser who has recently talked about China's hunger for US treasury bonds as source of a strong dollar is also reporting on Feldstein and his inaguration into the dollar doomsday cult.  

"No surprise, Dr. Feldstein's oped was music to my ears.  Not because he believes that a large fall in the dollar is needed to correct the current account deficit. (...) But because it sometimes feels a bit lonely railing against the data that showed a huge surge in private inflows to the US in 2005."

And finally, inspired by New Economist's post , Angry Bear also takes up the discussion about "the Net Income From Abroad Puzzle". Most notably, Mr Bear points us to two papers from the Congressional Budget Office (CBO).

One about: "Return on Cross-Border Investment: Why Does U.S. Investment Abroad Do Better?" and one about: "Why Does U.S. Investment Abroad Earn Higher Returns Than Foreign Investment in the United States?"; I wonder whether we can trust the numbers in those two.