I came across this article
(http://www.stlouisfed.org/news/speeches/2001/04_10_01.html) when
looking up figures on the US trade deficit. Believing myself fairly
well informed on the accounting mechanisms of the Balance of Payments,
I was baffled by two assertions in Mr. Pooles speech:

1. "Assume that a foreign firm decides to build or expand a production
facility in the United States...In each of these cases, foreign
residents are increasing their claims on assets in the United States.
In terms of balance of payments accounting, these transactions would
tend to increase the U.S. capital and financial account surplus,
which, in turn, means that the U.S. current account deficit would
increase."

My understanding is that this FDI transaction would affect the capital
and financial account in the following manner: A debit, due to the
inflow of foreign exchange assets, and a credit to record the FDI
investment. Therefore, the effect on the capital and financial account
is neutral as the debit offsets the credit. How can this "lead" to a
current account deficit? Am I missing something?

2. "A return to smaller current account deficits requires a rise in
saving and/or a fall in investment as a share of gross domestic
product."

I know that mathematically I can show that CA = S-I, but conceptually,
how will this lessen the deficit...what is the unexpressed assumption
here?

The U.S. current account deficit is my speciality... :-)

I'll answer ("comment") on the second issue. When you consume more
than you earn, you lend money from the bank. When nations operate this
way, they accumulate current account deficits. In essence, a CA
deficit is a sign that a country's consumption is higher than its
savings, so it has to attract money from abroad.

The prime reason for the U.S. CA deficit is that private savings are
at a record low. In order to reduce the deficit, consumers need to
consume less (=save more); but if we talk about firms, they do not
consume but invest. It's just a question of definition: in national
accounting all firms' expenses are counted as investments.

So higher savings and a fall in investment are actually the same. And
just as you can reduce the amount you need to borrow from the bank to
finance your expenses by cutting back spending, the U.S. can reduce
its CA deficit if its consumers start saving more.

I hope this clarifies this issue...

PM

PS: In case you get really interested in this topic you could consider
looking at the study "The Unsustainable US Current Account Position
Revisited" by M. Obstfeld and K. Rogoff. You can download it from
here:

http://www.nber.org/papers/w10869