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CHAPTER 18 International Trade: Current Account Deficit ≡ Capital Investment – Domestic Savings

The international trade axiom that holds that a current account deficit is identical to capital investment minus domestic savings is the means by which Ben Bernanke convinced the world that the U.S. Fed knew how, with cooperation, to prevent a then-looming crisis in September 2007. After Mr. Bernanke’s solution was bypassed and undermined for about a year (as the crisis built), it is by this axiom that the theory of financial stability, applied by the Fed and other monetary authorities, created a bridge to support new policies that have the ability to generate a worldwide recovery. There must be worldwide cooperation, however, to establish market policies that are consistent with this theory.

The implications of this equation explain not only the 2007–2009 crisis, but also each and every international financial bubble and bust that occurred since international trade began. As mercantilist exporters, every major nation in Europe (and Asia) has been surprised when excesses relating to investments made in the capital markets of importing nations (and real estate inflation at home) end up as banking or investment crises.

That is the price of all mercantilist folly, however. By refusing to spend imported currency (to maintain the mercantilist’s desire for a current account surplus), the money received for its exports must be invested to inflate something. When growth of consumption is ...