Since the world does not, as yet trade with Mars, the numbers must be wrong, so some of America' s current-account deficit may be more apparent than real. But not all of the recent rise, or even most of it, can be explained this way In fact, America's current-account deficit is becoming worryingly large. Several studies suggest that economies hit trouble when their current-account deficits reach 4-5% of gDP. caroline Freund, an economist now at the imf and before that at the federal reserve looked at 25 episodes of current-account adjustments in rich countries between 1980 and 1997 and found that the current account typically begins to reverse after the deficit has grown for about four years and reached 5% of GDP Another study at the IMF found only 12 episodes since 1973 where industrial countries have run a deficit of over 4% of GDP for more than three years in a row. All of the countries involved were relatively small and open economies. Does it matter that America's current-account deficit is already an outlier by conventional benchmarks? Optimists claim not pointing out that America has seen a big rise in productivity growth. That not only explains the higher borrowing(to fund the investment boom), but also makes it easier to finance the debt There is something in that. america's productivity growth did rise sharply in the late 1990s pushing the economy' s trend rate of growth from about 2.5% to 3-3.5%o. But the current-account deficit has increased far more rapidly. Worse, it is still rising even though the investment boom is over. America is different Second argue the sanguine america has unique characteristics that allow it to run a larger deficit. It can borrow in its own currency which also happens to be the global reserve currency And it has the world's largest and most liquid stock and bond markets. Certainly these dvantages allow America to borrow more than others. They reduce the risk of balance-of- payments crises of the sort that befall emerging markets, such as Argentina or Mexico, where no one is willing to lend them money at almost any price. but they do not remove all limits a better reason to take comfort is that the stock of debt is still relatively modest America resembles a rich man Sinking into debt who has discovered credit-card bingeing late in life. At America's net international investment position the end of the 1970s, after decades of almost continuous at market value, as %of GOP current-account surpluses, the United States was a creditor country with a net stock of foreign assets worth about 10% of gdp. persistent current-account deficits turned the country into a net debtor in 1985, since wher it has been getting deeper and deeper into the red. At the end of 2002, net external debt reached 25% of gDp (see chart 4) That is higher than the debt levels at which some Latin American countries hit financial disaster in the 1980s debt crisis, and on a par with the peak debt level 198284868899949698200002 Source: US Bureau of Economic Analysis America reached in the 19th century, but it is not especially high by the standards of other rich countries Many industrial nations have net foreign debts worth 40-50% of GDP. Australia' s debt stock, forSince the world does not, as yet, trade with Mars, the numbers must be wrong, so some of America's current-account deficit may be more apparent than real. But not all of the recent rise, or even most of it, can be explained this way. In fact, America's current-account deficit is becoming worryingly large. Several studies suggest that economies hit trouble when their current-account deficits reach 4-5% of GDP. Caroline Freund, an economist now at the IMF and before that at the Federal Reserve, looked at 25 episodes of current-account adjustments in rich countries between 1980 and 1997 and found that the current account typically begins to reverse after the deficit has grown for about four years and reached 5% of GDP. Another study at the IMF found only 12 episodes since 1973 where industrial countries have run a deficit of over 4% of GDP for more than three years in a row. All of the countries involved were relatively small and open economies. Does it matter that America's current-account deficit is already an outlier by conventional benchmarks? Optimists claim not, pointing out that America has seen a big rise in productivity growth. That not only explains the higher borrowing (to fund the investment boom), but also makes it easier to finance the debt. There is something in that. America's productivity growth did rise sharply in the late 1990s, pushing the economy's trend rate of growth from about 2.5% to 3-3.5%. But the current-account deficit has increased far more rapidly. Worse, it is still rising, even though the investment boom is over. America is different Second, argue the sanguine, America has unique characteristics that allow it to run a larger deficit. It can borrow in its own currency, which also happens to be the global reserve currency. And it has the world's largest and most liquid stock and bond markets. Certainly these advantages allow America to borrow more than others. They reduce the risk of balance-of￾payments crises of the sort that befall emerging markets, such as Argentina or Mexico, where no one is willing to lend them money at almost any price. But they do not remove all limits. A better reason to take comfort is that the stock of debt is still relatively modest. America resembles a rich man who has discovered credit-card bingeing late in life. At the end of the 1970s, after decades of almost continuous current-account surpluses, the United States was a creditor country, with a net stock of foreign assets worth about 10% of GDP. Persistent current-account deficits turned the country into a net debtor in 1985, since when it has been getting deeper and deeper into the red. At the end of 2002, net external debt reached 25% of GDP (see chart 4). That is higher than the debt levels at which some Latin American countries hit financial disaster in the 1980s debt crisis, and on a par with the peak debt level America reached in the 19th century, but it is not especially high by the standards of other rich countries. Many industrial nations have net foreign debts worth 40-50% of GDP. Australia's debt stock, for