The Current Account Deficit: A Necessary Condition for the Housing Boom

Abstract

In the last two chapters I reviewed empirical evidence showing a chain of causation running from offshore mercantilism to the growing US current account deficit, and from the current account deficit to the US housing boom. The evidence points to Southeast Asian, OPEC and Chinese mercantilism as the primary underlying cause of the growth of the US current account deficit and the housing boom. In this chapter, I provide another reason for linking the current account deficit to the housing boom by explaining why, given spending patterns in the United States, the ballooning US current account deficit was a necessary condition, in the absence of which the 2003–2007 US housing boom could not have occurred.