ent-account deficit reached a record $167 billion equivalent to 3.7 per cent of gross domestic product. But at the time the U.S. still enjoyed substantial inflows of private, long-term investment capital of about $60 billion (Financial Times, 1994).
In 1993 the U.S. current-account deficit was only $109 billion, but net long term capital (securities transactions and direct investment) recorded an outflow of more than $40 billion. Thus comparing 1987 and 1993, the sum of the current account deficit and net long-term capital flows was about the same, at 2.2% of GNP. However if one takes a look at 1994 and 1995, the U.S. balance of payments seems poised to reach real records. The current account deficit rose to approximately $145 billion in 1994 and may reach an estimated $170 billion in 1995, or some 2.5 percent of GDP. But one would have to add to this long-term capital outflows which are assumed at some $50 billion to $60 billion a year or 0.75% of GDP.
As Table 2 shows, the U.S. faces the problem of obtaining financing for the growing amount of dollars it is creating via its balance of payments deficit. What's really new about the U.S, current account deficit is not its size, nor is it the weakening dollar exchange rate; the trade-weighted dollar index has fallen by about 25% since 1971. This big news is that so little of the deficit these days is being financed by real, or private investors. According to Mickey D. Levy, the chief financial economist at Nations Bank Capital Markets Inc., the portion of the U.S. current account deficit financed by foreign private investors diminished to approximately 16% in sharp contrast with the approximate 50% absorption by foreign private investors of the huge current account deficits in the 1980s -- U.S. current account deficits averaged $134 billion between 1984 and 1988 (Grant's, July 29,1994).
A current account deficit is normally financed by a capital account surplus--we buy...