The Twin Deficit Problem
The U.S. finances its current account deficits by issuing financial claims—stocks, bonds, Treasury issues, bank accounts, etc.—to the rest of the world. When foreigners hold net financial claims on the U.S., Americans tap these funds to finance investments and consumption. Any country that runs a current account deficit like ours and experiences an inflow of foreign savings will find that its domestic investment exceeds its domestic savings by exactly that amount, assuming no measurement error.
Suggested citation: "The Twin Deficit Problem," Federal Reserve Bank of Cleveland, Economic Trends, no. 04-12, pp. 09, 12.01.2004.