Net capital exports, of course, are simply the obverse of current account surpluses, and one of the easiest ways for policymakers to increase net capital exports is to do so officially, through reserve accumulation. This is what seems to be happening. The combination of currency intervention and financial repression (setting domestic interest rate artificially low) allows central banks to accumulate foreign reserves in a non-inflationary way, and, as a consequence, to turbo charge the current account surplus, although at the expense of overinvestment and, in the case of some countries, severe domestic imbalances.Obviously this can only go on if there are countervailing current account deficits and net capital imports elsewhere. Until recently there have been two very large countervailing deficits—that of the US and that of the trade-deficit countries of Europe. The latter, because of the European financial crisis, will have real difficulty in maintaining their trade deficits as net capital imports dry up, so that pretty much leaves the US as the world’s only great trade deficit country.

 

The appetite in the US for running up larger deficits, however, is clearly finite. I expect rapid reserve accumulation, along with a rising US trade deficit, will continue over the next year or so but will thereafter slow sharply—not because of intelligent and responsible polices implemented by policymakers in the major economies, but simply as a consequence of rising anger in the US and a protectionist move to counter trade policies elsewhere. It is hard to see how this does not end badly.