Basically, tying to understand your argument better, so would appreciate if you could take the time to address/clarify the above. Thanks, Puneet.

And, so unless I am misreading you, in which case I am happy to be corrected, I see the same conflation creeping back-in from your recent posts on substack and elsewhere. Am stating this and tagging few others only in the most constructive spirit of dialogue and collective learning on this platform.

As an aside, we sure can calculate GROSS non-trade financial flows. Multiple ways to do so (one, for e.g., is in Obstfeld. 2018, "Does the Current Account Still Matter"). Also, after the GFC there was some course correction toward not conflating non-trade financial flows with net CA/FA balance.

But, does not hold due to some relationship that may be 'evident' from the CA and FA balances matching each other. For, those balances simply don't have any element of non-trade financial flows, and are just trade related flows with opposite signs (and w. Net Inv. Income being in the CA balance).

As such, the argument you've made recently in several of your writings, that non-trade financial flows into US' deep and highly liquid financial markets drives its persistent trade deficit, holds only insofar as these flows keep the dollar strong / buoyant.

Hence, when we net out the FA, all non-trade financial flow transactions always cancel-out and what remains in the resulting FA balance are net trade payments made/received (as their other end is in the CA). In effect, the FA balance is the trade balance minus NII (with statistical inaccuracies).

As do investment income (interest, dividend) flows. But, importantly, given double-entry bookeeping, actual payments made/received for these very imports/exports gets recorded in the FA. By contrast, BOTH sides of non-trade financial flows (FDI & Portfolio Inv.) are recorded in the FA itself.

But, these net balances only reflect trade flows, not non-trade financial flows. That is, the (+/-)CA or (-/+)FA balances do not reflect financial flows, as in, FDI and Portfolio Investment flows. This is because the value of goods and services traded (exports and imports) gets recorded in the CA.

With due respect, @pkrugman.bsky.social al your view that the Current Account (CA) / Financial Account (FA) balance reflects net *financial* flows seems a bit misplaced. Of course, the FA and CA balances will match each other (with the opposite sign and with some degree of statistical inaccuracy).

Great piece. Related is also this strange desire to dramatically cut the current account deficit (if not run a surplus?) while also being the issuer of the reserve / top currency. How will the RoW earn dollars? Through the Financial Account? If so, how would those claims finally settle? Baffling!

Also paying off debt.

Nothing better to undermine the dollar’s dominance than cutting imports and/or dreaming about the US running a current account (CA) surplus. After all, running persistent CA deficits—to be sure in goods, not services in the case of the US—is a precondition for being the issuer of the global reserve.

Also paying off debt.

Nothing better to undermine the dollar’s dominance than cutting imports and/or dreaming about the US running a current account (CA) surplus. After all, running persistent CA deficits—to be sure in goods, not services in the case of the US—is a precondition for being the issuer of the global reserve.