Economists and policy-makers have been at a loss to explain the seemingly miraculous ability of the American economy to continue to thrive despite the monetary and financial chaos that has engulfed much of the rest of the world since the collapse of the Mexican peso in December of 1994.
With various periods of remission, the chaos has spread since that time through Southeast Asia, South Korea, Russia, and finally Brazil and most of the rest of South America. Africa and the Middle East have not escaped, Japan is in a severe and prolonged recession and even Europe is mired in stagnation, confounding forecasts of a vigorous recovery.Some commentators have claimed that the growing and already huge U.S. current account deficit will be the Achilles heel that will put an end to this American ''miracle,'' forcing a severe depreciation of the dollar, reawakened inflationary pressures and an increase in interest rates. This, in turn, would burst a grossly over-inflated U.S. financial ''bubble,' resulting in world-wide financial and economic disruption.
Other observers believe that, on the contrary, the American economy has entered into a period of a new economic paradigm - a transition from the centuries-long dominance of first commercial, then industrial, and finally financial capital to intellectual capital, rendering most of the traditional tools of analysis (not to mention indicators and statistics) obsolete and misleading.
While the rest of the world was plowing its resources into the instruments of the old paradigm, the United States was using others' resources - the capital account surplus - to invest in the new paradigm. This has led to a situation where the rest of the world must have what we can produce, but we can do without most of what they individually produce. That is because there are so many competing sources we can access, and they have only us to supply their needs for the products of the new technologies that characterize the new economic paradigm.
If the above is at least partially correct, there may in fact be no financial bubble in the United States, or at least less of a bubble than feared by so many commentators. There is no doubt that the world is now in a deflationary mode, but there is a vast difference between deflation with expansion, as is the case here (as it was in the last quarter of the 19th century, a golden age in our economy), and deflationary recession outside the United States.
Perhaps the only serious threat that the current account deficit poses to the American expansion lies in the political sphere - the danger of a fatal political reaction of protectionism that could decisively derail what is very much looking now like a roaring American entry into the next century.