The US current account deficit - the excess of what Americans spend on goods, services and funds transferred abroad over what the US earns from the rest of the world - now exceeds $500bn a year, 5 per cent of gross domestic product. Its size is unprecedented and it permits many countries to run surpluses that would not otherwise be possible. It has become conventional wisdom, to use Kenneth Galbraith's memorable term, to believe the US deficit is unsustainable, with the implication that, by deliberate policy changes or by disorderly financial crisis, it must decline significantly.

I disagree. To see why, suppose that the deficit continues indefinitely at $500bn and look at it first from a US perspective and then from that of the rest of the world. Suppose, as is reasonable, the US economy has a trend rate of growth of 5 per cent a year, 3-plus per cent in real terms and 2 per cent inflation or a little less. A current account deficit implies the world is investing in the US economy, buying all kinds of assets - bonds, stocks, land, even dollar bills. By late 2002, foreigners had total claims on the US economy of $2,600bn net of US claims on the rest of the world (equal to 25 per cent of US GDP in 2002), according to official data.What are the implications of our assumptions of an indefinite deficit of $500bn a year and 5 per cent growth? If the current account deficit remains constant and GDP grows every year, the ratio of net external claims to US GDP - a ratio used by many economists in assessing sustainability - will rise until it peaks at 46 per cent after 15-16 years, after which it will decline indefinitely.