On bankunderground, Michael Kumhof, Phurichai Rungcharoenkitkul, and Andrej Sokol question that foreign savings is an important driver of US current account deficits:

Consider how US imports can be paid for in the real world: first, by transferring existing domestic or foreign bank balances to foreigners, which involves no new financing. Second, by borrowing from domestic banks and transferring the resulting bank balances to foreign households, which involves domestic but not foreign financing. And finally, by borrowing from foreign banks and transferring the resulting bank balances to foreign households. Only the last option involves foreign financing, but in practice it is the least likely option for most domestic residents.

Gross balance sheet positions are critical to discern current account financing patterns. We show that, unlike current account deficits triggered by credit shocks, deficits caused by foreign saving shocks (as in the global saving glut narrative) are not able to reproduce the highly elastic behavior of US credit observed during the saving glut period.

This has stark policy implications. The global saving glut hypothesis puts the onus of adjustment on current account surplus countries. It encourages them to boost aggregate demand to reduce their “excessive saving”. But from a gross-flow perspective, this approach could in fact exacerbate domestic vulnerabilities, by triggering credit booms in surplus countries (see China more recently or Japan in the 1980s). In that light, the onus of adjustment ought to be on deficit countries, to the extent that their “excessive credit” is the reason for their large deficits.

They discuss the Triffin dilemma:

One version of Triffin’s dilemma posits that a growing world economy requires an increasing quantity of the global risk-free reserve currency. This is taken to imply that the economy issuing the reserve currency must run persistent current account deficits, eventually becoming increasingly indebted to foreigners, until the currency ceases to be risk-free.

This is flawed in both fact and logic. In fact, the US ran almost uninterrupted current account surpluses until the early 1980s while global dollar reserves grew. And in logic, it treats as equivalent changes in the quantity of physical resource flows and in the quantity of currencies. But the creation of dollars only requires digital bank credit, which is independent of physical trade deficits incurred by households and firms, as can be shown in our model. There is therefore no dilemma.

And capital flow correlations:

Gross capital inflows and outflows are highly correlated. From the perspective of net flow models, the two legs of such gross flows must result from two separate decisions. In a typical narrative, foreign investors are the recipients of domestic outflows and “send the capital back”, resulting in a build-up of gross positions. But at the aggregate level, such correlation necessarily follows from the accounting rules for financial flows ... The only possible reasons for a less than perfect correlation are a large role for payment flows (whose matching counterpart is not a capital flow but a goods flow), and measurement error.