Crying wolf?

There is more and more talk about our current account deficit, so much talk that I'm reminded of the old tale of the boy crying wolf. Remember that eventually the boy was right!

Sebastian Edwards of the National Bureau of Economic Research is the latest to do so in a (subscription-only) piece entitled "America's Unsustainable Current Account Deficit. Some quotes from that article:

• "Never in the history of modern economics has a large industrial country run persistent current account deficits of the magnitude posted by the US since 2000."
  
• "The results from this investigation indicate that major current account reversals have tended to result in large declines in GDP...These estimates indicate that, on average…the decline in GDP growth per capita has been in the range of 3.6 to 5 percent in the first years of adjustment. Three years after initial adjustment, GDP growth will still be below its long-term trend."

Edwards bases his conclusion on his analysis of previous historical situations which leads him to believe that GDP will fall sharply as foreign investors are unlikely to keep propping up U.S. trade and budget imbalances and spending sprees indefinitely.

The result, Edwards believes, would be a 21-to-28 percent depreciation in the value of the trade-weighted dollar and a considerable slowdown of the American economy. And that may be a "best case" scenario. He warns that the damage inflicted on the U.S. economy by a sharper and/or more immediate correction in the current account deficit could actually be much worse.