A couple of years ago, I wrote a piece in the Fin about the precarious economic situation in Iceland, a small country with a massive current account deficit. Now it appears, the full-scale implosion I talked about has come to pass. Rather startlingly, Iceland is looking to Russia for a bailout. Among the implications noted by Felix Salmon, the fall of the S&P index below the 1000 level it first reached back in 1997.
As I say in the article, Australia is much less vulnerable than Iceland. Still, it is now clear that the consenting adults theory of current account deficits has its limits. We’ll just have to hope that we are within those limits, and that we can turn the recent trade surplus into the beginning of a sustained reduction in our net foreign debt.