On the issue of the importance (or not) of CADs, BOT, NFD and NFE I highly recommend
this reading. Best summary of the topic I have found in a long while.
thx for the ref HE.
I do understand the BOP and how CADs are funded by CAS trading partners, which is tabled in the 'Balance' of Payments.
Nevertheless, I think it quite academically slothful for Stein's camp not to elaborate the limitations of this view. If they think all CADs and NFDs are good, and FX can adjust perfectly under all circumstances, then they can't be taken too seriously.
A simple logic test I like to apply is to take a particlar generalist view to its logical extreme. In this case,
- is a sustained 100% CAD/GDP ratio plausible? obviously not. then what is a sustainable ratio?
- is a sustained NFD 100x the size of a country's saving rate plausible? I don't think so as what is the interest paid with?
The relationship between a CAD and
ONE of its trading partners will rarely be strong enough to allow FX to perfectly counterbalance changes in strength of trade.
Finally, I appreciate there's two views on the sustainability and relative good of CADs. The CAD camp believe demand for foreign goods drives foreign investment by CAS economies in CAD economies. The CAS camp believe foreign CAS economy demand for CAD assets and dollar are the driver.
In real life, it will be a dynamic mix of both. But history and human nature, belies foreign investors hold foreign interest utmost, and therefore, foreigners are more likely to:
- be sure their investment can be returned,
with interest
- suck a trading partner dry, then walk off to greener pastures.
History shows a combination of sustained CADs and NFDs have limits. The countries that have been able to sustain them, like Australia, are generally running down and selling off ownership of their natural resources and selling off the opportunity to use the wealth to diversify the nation's future wealth. Australia would reconsider its reliance on foreign investment if it applied itself more vigorously to using cash flows for innovative export opportunities.
There's only poor excuses from Australia, for not converting mining profits into becoming world leaders in telecommunications and solar technology/IP and pharmaceuticals.