Moreover, based on research by Patricia Pollard, an economist at the Federal Reserve Bank of St. Louis, it is clear that the twin deficit phenomenon is not a historical regularity in many advanced countries. She found that the changes in these two accounts are as likely to be moving in opposite directions as the same direction. Now let s turn our attention to saving, both private and government, and investment. The current account deficit increases if either saving increases less than investment increases or if saving decreases more than investment decreases. Generally speaking, saving and investment are both desirable.
Saving frees up resources that can be used for investment either here or abroad.
Gross private domestic investment, which includes the purchases of durable goods, such as business equipment, is essential for expanding both productive capacity and productivity. Such expansion permits more output to be produced in the future. Chart 3 shows that the rising current account deficit in recent years has been accompanied by a rising rate of U.S. domestic investment. Between 1993 and 1997, the current account generally stayed in the range of 1.0 to 1.5 percent of gross domestic product, as a rising national saving rate, caused primarily by declining federal budget deficits, kept pace with rising domestic investment. Chart 4 illustrates another fact that bolsters the contention that an increasing current account deficit is evidence of a strong and healthy economy.