But I did manage to get to the Ely Lecture, and boy am I glad that I did. The text for the lecture is not on-line yet, so I am writing from memory and some sketchy notes, caveat emptor. [
UPDATE: Obstfeld sent me a copy of a Dec 2011 lecture which is along the same lines as his Ely lecture, and more emphatic about the importance of gross positions.]
The empirical context of the lecture was financial globalization. The question was whether financial flows are now so efficient that the current account between countries is of no more importance than the current account between states within a country (which we don’t even measure). Obstfeld’s answer, “No”, implies that the current account still matters.
But why does it matter?
Obstfeld makes a big point that the current account represents an intertemporal trade, where the deficit country obtains current tradeable goods in trade for future tradeable goods. Borrowing from the future in this way may be perfectly fine, but it may also be an “important indicator of potential macro and financial stresses”. The stress he has in mind comes from the fact that, at some future point, the deficit country is going to have to come up with the promised tradeable goods, which means running a current account surplus.
So far so orthodox, you say, and I agree. What made the lecture worthy of notice is the very large amount of attention paid, in the pages between the setup and the payoff, to the gross flows, of both goods and financial assets, that lie behind the net flow measured in the current account. Obstfeld seems to be moving in the direction of the Money View, but not yet all the way.
Just so, consider his distinction between “intratemporal” and “intertemporal” trade. He emphasizes that most of the gross trade of goods is intratemporal, which is to say the outflow of one kind of current good and the inflow of another kind of current good. Only the net flow is intertemporal, the inflow of current goods against the promise of future outflow, and that is the potential indicator of stress.
Shifting attention to the capital account, he makes the same distinction between gross financial flows (“intratemporal”) and net financial flows (“intertemporal”). Again, the net flow is the main potential indicator of stress, but now maybe not the only one. A good part of the talk was concerned with the cumulative gross flow and the possibility that valuation changes in net asset balances could be a source of fragility.
Such valuation changes are, Obstfeld emphasized, quite large, often swamping the net flow. Indeed one of the reasons that the U.S. has been able to continue running large current account deficits is that valuation changes have been large and in the opposite direction. In effect the US has been borrowing without incurring debt—nice work if you can get it! The worry is apparently that valuation changes might possibly move in the same direction as the net flow, but empirically valuation changes seem mostly to be transitory. Conclusion, valuation changes of gross positions can pose temporary problems, and also temporary solutions (as in the US), but in the long run the action is in net flows.
Good stuff, but here is my money view quibble, maybe more than a quibble.
First, intertemporal trade arises not only from net flows, but also from gross flows. The United States, viewed as a bank (following Kindleberger), borrows short and lends long. Even if net borrowing were zero (so no intertemporal exposure according to Obstfeld), this maturity mismatch creates a potential vulnerability. We are promising near-future goods to our creditors, while accepting promises for distant-future goods from our debtors. Gross flows involve intertemporal trade just as much, and maybe more (given volume) than net flows. [BTW, the same could be said about gross flows of goods, as for example when outflow of current services is matched with inflow of long-lived capital goods.]
Second, the money view would go even further. The vulnerability is perhaps not so much about intertemporal mismatch as it is about liquidity exposure. The balance sheet of a bank like the U.S. involves systematic exposure to a “survival constraint”. If creditors all demand their money at the same time, the reserve outflow can become impossible to sustain—that’s a bank run. The point is that creditors don’t want current goods, they want money. The current reserve status of the dollar may hide this fact, but it remains behind the scenes in the gross balance sheet exposures.
At one level, neither of these points change the answer to the question of Obstfeld’s title. The current account does still matter. But other things matter too, and maybe more. A current account deficit is neither a sufficient nor a necessary condition for vulnerability. In the brave new world of financial globalization, gross flows also matter, and so do gross stocks (liabilities and assets both). Indeed, in the short run where we all live, gross flows and gross stocks may well sometimes be all that matters.