* Erik Reuter ([EMAIL PROTECTED]) wrote: > If US interest rates rise, then we will no longer have a surplus on > investment income. If the US net foreign debt reaches 50% of GDP at a > real interest rate of 2%, then the trade deficit will have to fall to > 2% of GDP or lower to be sustainable (Setser and Roubini say it will > need to go to 1%).
Actually, I should have said "...current account deficit will have to fall to 2% of GDP or lower..." My number was the approximate sustainable current account deficit, Setser's 1% number is for the trade deficit. The formula for a constant foreign net debt to GDP ratio is (approximately, it neglects unilateral transfers and other small flows) g = i + (M-X)/Y / (NFD/Y) Real GDP growth is the sum of the real interest rate on net foreign debt and the ratio of the trade deficit as a fraction of GDP to the net foreign debt as a fraction of GDP. As an example: 3.5% = 2% + 0.75% / 50% A real GDP growth rate of 3.5% per year can indefinitely sustain a net foreign debt of 50% of GDP with a real interest rate of 2% and a trade deficit of 0.75% of GDP. The corresponding sustainable current account deficit would be 1.75% of GDP. -- Erik Reuter http://www.erikreuter.net/ _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
