The other way the current account deficit could come to an end is if the inflow of capital into America comes to an end. As the late Rudi Dornbusch used to say, unsustainable capital inflows always last much longer than fundamentals-watching economists believe possible. The investors funding the capital inflow and the country receiving the money always think up reasons why this time the inflow is not unsustainable but is the result of permanently transformed fundamentals. That mass delusion, Rudi argued, keeps the inflow going long after it should come to an end. But when it does come to an end, the speed with which the capital flow turns around is much faster than anyone--even fundamentals-watching economists--believes possible.DeLong doesn't believe that the United States will suffer the same fate as other countries- such as Argentina and Mexico- but will have a remarkably different effect on two groups: foreign investors and exporters, and American investors and consumers.
The currency crises in Mexico, East Asia, and Argentina primarily impoverished workers who lost their jobs and those who found their hard-currency debts owed to the industrial core suddenly a much greater burden, and secondarily rich country investors who found themselves renegotiating terms with insolvent creditors. A rapid decline in the dollar is likely to have a very different pattern of impact: to primarily impoverish workers whose products are exported to America and investors in dollar-denominated assets who see their portfolio values melting away, and only secondarily affect Americans who heavily consume imported goods or who work distributing imports to consumers.Disturbing, because it means that the run from the dollar will be a stampede, and it could have a shockwave effect around the global economy. It also raises the question: if DeLong knows this, who else does, and is it possible that foreign countries might move away from the "buyer of last resort" and intensify their connection within regional trading blocs that the United States is politely refused membership in?
What happens when (or if) Japan, China, and Korea turn their back on the U.S.?