However if foreign direct investment into the United States were to drop rapidly, then it would lead to a sharp decline in the dollar's value, making the current account deficit unsustainable, and lead the U.S. economy into a downward spiral, argued Laurence Meyer, who was a Fed governor until earlier this year.
"Productivity and speculative excesses are why there has been no correction in the foreign exchange rate," said Meyer, speaking at a conference on the market risks and policy responses of the U.S. current account deficit.
While the legitimacy of Meyer's argument is debatable, there is no doubt that there is mounting concern among policymakers that the United States cannot continue to see its import levels vastly outstrip its exports, and at the same time keep the greenback strong while racking up a budget deficit.
In the fourth quarter of 2001, the latest available data, the Commerce Department reported the U.S. current account deficit -- the combined balances on trade in goods, service, income, and net unilateral current transfers -- increasing to $98.8 billion, compared to $98.5 billion the previous quarter. Moreover, the gap is expected to widen still further in coming months.
The Bush administration, however, has pointedly dismissed the growing current account deficit as a source of concern. In fact, Treasury Secretary Paul O'Neill has repeatedly stated to date that a sustained increase in imports over exports only highlights the attractiveness of U.S. markets to overseas investors, which is unlikely to change.
"The U.S. financial market is deeper than that in Europe or Japan," given that the United States is by nature more diverse and easier to invest in than other countries, said the International Monetary Fund's chief economist Kenneth Rogoff. "When capital markets are deeper, a run on the current account deficit can have a different effect" than in other nations, he added.
Brokers Salomon Smith Barney's managing director Jeffrey Shafer also pointed out that, according to official statistics, productivity gains in the United States remained the highest in the world, and given the lackluster markets of the European Union and Japan, it was more than likely that overseas investors would continue to pour their money into U.S. shores.
But even if the unique features of the U.S. markets allowed the country to be more accommodative to a current account deficit and the country remained the most product compared to other industrialized countries, a large number of prominent economists, including the former Fed's Meyer, argue that a growing deficit cannot be sustained indefinitely.
Meyer also pointed out that if there was a correction in the equities market as domestic investors realized that they had bought in too heavily to the idea of U.S. productivity gains and a never-ending boom, then it is likely that sooner or later, foreign investors too would assess that they remain too heavily exposed to U.S. assets.
Even Salomon Smith Barney's Sharf admitted that euphoria over U.S. markets could wane over time, particularly in light of increased investor doubts about corporate reporting and responsibility following the collapse of energy giant Enron Corp.
"Enronitis has become a regular word, I think, and since Enron, the U.S. has become less attractive to foreigners," Sharf said. Moreover, he noted that even if there were bargains to be found in the U.S. markets, overseas investors were often not in the position to take up lucrative offers given their own financial constraints.
But even as a broad consensus about gloomier prospects for the U.S. economy was reached, the former Fed governor made a point of stressing the central bank's inability to direct either the current account deficit or financial markets in general.
"Monetary policy cannot affect the current account deficit ... it can only respond to a market-driven process," Meyer said, adding that the Fed does not target any particular deficit limit.