Market Correction

3 December 2006

The Editor, The Economist
25 St James's Street
London SW1A 1HG
United Kingdom

SIR:

You write that foreigners who buy dollar assets "finance the country's vast current-account deficit" ("The Falling Dollar," Dec. 2). By suggesting that America's current-account deficit necessarily bodes ill for Americans, your language misleads - on two counts.

First, this deficit is at least as much the RESULT of foreigners seeking to invest in the U.S. as it is of Americans importing lots of goods and services. The more attractive America becomes to investors, the more foreigners invest here. These investments expand the U.S. economy and increase the U.S. current-account deficit.

Second, only about half of America's imports are consumer goods. The rest are intermediate components, raw materials, and capital goods. In fact, capital goods today are about a quarter of all U.S. imports, up from only four percent of imports in 1960.*

Sincerely,
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University

* Douglas A. Irwin, Free Trade Under Fire, 2nd ed. (Princeton University Press, 2005), page 12.