So tired of this misinformation. Of course economists understand this. A net capital inflow can be satisfied by running a current account deficit. The question is not whether the accounting identity holds, but which domestic adjustment margin moves: private saving, private investment, government borrowing, or some mix of all three. It’s not a secret mystery only Michael Pettis can illuminate. I taught this in class last month and it was literally on my midterm exam today.
2/9
He notes in this piece that "the domestic counterpart of its external deficits today is borrowing by the US government."
Many economists find this almost impossible to understand. They do not see how net capital inflows can contribute to rising US debt.