7-22. What is the connection between the U.S. current account deficit and capital account surplus? During the past decade the U.S. BOP performance could be characterized as follows:

● The U.S. current account recorded large annual deficits.

● The U.S. capital account recorded large annual surpluses of roughly the same magnitude as the current account deficits.

● Changes in the official reserves account were small relative to the magnitude of the current account deficits.

Two scenarios can be developed from the facts just cited:

● The sky is falling. U.S. industries are uncompetitive in international markets (as indicated by the first fact), and foreigners are taking over the country by buying up valuable U.S. assets and transforming the country into the largest debtor in international history (as indicated by the second fact).

● Everything is wonderful. Foreigners are so enthralled with the future prospects of the U.S. market, which is a showcase of economic democracy, that they are eagerly investing in the U.S. economy (the second fact). The only way they can do so, however, is by running a current account surplus with the United States (the first fact).