Introduction

Attracted by higher relative interest rates, foreign capital is swarming to the United States to finance the US Government’s deficit spending. The consequences of a continued deficit in our international accounts are as important as those related to the US Federal budget deficit. The drain on US savings represented by the Federal budget deficit has reversed the traditional role of the United States as a capital exporter. The main supplier of capital to the world and principally to the United States has been Japan with its unparalleled rate of savings. In essence, the financing of both our current account deficit and our internal capital needs — as long as the government deficit remains so high — is dependent on a historically high net capital inflow. In the short term, should continued budgetary and current account deficits erode confidence in the United States as a place for investment, the United States faces the prospect of higher interest rates.