Economists have failed rather dismally to construct
convincing theoretical models of why the
seemingly endless US current account deficits are
sustained by a seemingly endless willingness of the
rest of the world to acquire dollar assets. Reflecting
this conceptual inadequacy, many see the continuation
of such global “imbalances” to be unsustainable
because foreigners – both governments and their private
sectors – will eventually cease buying dollar
assets, which will trigger a collapse in the dollar’s
value in the foreign exchanges. Beginning with the
infamous twin deficits of the Reagan presidency in
the 1980s, such failed predictions have been commonplace
for more than 20 years.