Is the Current Account Deficit as Bad as They Say?

The Financial Times has a rather interesting article on how the current accounts deficit (more commonly and inaccurately referred to as the trade deficit) is not as bad as portrayed. It is a bit complicated but basically they argue that the important thing is that the income earned from investments bought by US citizens from foreign countries is much higher than the income earned by foreign citizens on investments bought from the US. So overall not nearly as much wealth is leaving the country as portrayed. Unfortunately I only have a subscription to the pink paper version of FT, not the on-line version, so I can't post much of the article, but if you get a chance read it.

‘Dark matter’ makes the US deficit disappear
By Ricardo Hausmann and Federico Sturzenegger Published: December 7 2005 20:40 Last updated: December 7 2005 20:40

In 2005 the US current account deficit is expected to top $700bn. It comes after 27 years of unbroken deficits that have totalled more than $5,000bn, leading to concerns of an impending global crisis. Once the massive financing required to keep on paying for such a widening gap dries up, there will be an ugly adjustment in the world economy. The dollar will collapse, triggering a stampede away from US debt, interest rates will shoot up and a sharp global recession will ensue.

But wait a minute. If this is such an open and shut case, why have markets not precipitated the crisis already?