The 7 per cent solution
If you’re trying to reconcile unlimited wants with limited resources, and someone is willing to lend you the money, borrowing looks like a neat solution. For nations, collective borrowing is measured by the current account deficit. Until quite recently, however, it seemed to be generally accepted that there was a limit beyond which such borrowing was imprudent and that the limit was around 5 per cent of GDP.
There are some good arguments against the traditional view, and we’d better all hope they are valid, though I fear they are not. I’m working on a big piece on this. More soon I hope.
fn1. More precisely, by the capital account surplus which is equal and opposite to the CAD.