Many in the United States are concerned about whether the People's Bank of China and other foreign entities will continue buying enough US Treasury bonds to help Washington fund its deficit. But strangely enough, the real problem is exactly the opposite - the US will suffer from far too much foreign money coming into the country, which will push up its trade deficit while making it altogether too easy for the US Treasury to finance its bond issuance.
To see why, we simply need to remember that for every country, the current account and the capital account balance to zero. Countries that run current-account surpluses must export capital, while countries that run current-account deficits import capital.
There are six major players in the world of net international capital flows. Four of them - China, Germany, Japan and the Arab Opec countries - are huge exporters of capital. How do we know? Because they all ran huge current-account surpluses.
Total capital exports, of course, must be matched by total capital imports, and the two remaining major players are huge capital importers - the US and the trade-deficit countries of Europe, including Spain, Portugal, Italy and Greece.
Ignoring Opec, whose trade balance is determined largely by the price of oil, the net capital exporters are all net trade exporters because they impose constraints on domestic consumption. These constraints will be very difficult to reverse quickly.
For this reason, these countries are heavily dependent on huge current-account surpluses to absorb excess domestic production. In fact, they seek to maintain or even increase their current-account surpluses to generate domestic employment growth.
This is the same as saying that they are doing everything they can to maintain or even increase their net capital exports. China has been very reluctant to allow its currency to appreciate against the US dollar, and is even permitting real interest rates to decline, thereby forcing up the size of its trade surplus.
