What is the capital account?
Writing in the Economist, Mark Thoma says something remarkable:
"A COUNTRY that runs a current account deficit is borrowing money from the rest of the world. As with any loan, that money will need to be paid back at some point in the future. The cost of these loans is the interest that must be paid, and any vulnerabilities to speculative attacks that come with them."
We know that a current account deficit means there will be a roughly equal sized capital account surplus. But there is nothing about the capital account that requires the net foreign investment be in bonds!
Foreign direct investment (FDI) is part of the capital account. If companies around the world build more factories in country A than country A companies do around the world, then country A (all else equal) will have a capital account surplus and a current account deficit. Net foreign purchases of equities are also part of the capital account. If more foreigners buy stocks in Country A that citizens of Country A buy in foreign countries, that contributes to Country A's capital account surplus (and current account deficit).
I don't consider net FDI or net foreign purchases of equities loans. Do you?
Suppose Toyota buys a factory from Ford. Does that mean the US is borrowing money from Japan? Suppose Lionel Messi buys shares in IBM. In what sense is that the US borrowing money from Argentina? There is no requirement that the government or domestic individuals buy these items back later. Suppose I buy a factory from Ford. Is the rest of the country borrowing money from me?
Maybe Mark is speaking broadly, metaphorically, and considers profits of foreign owned factories and dividends on foreign owned stocks as "interest on loans"?
Even if this is so, FDI is decidedly NOT "money that will need to be paid back", nor am I aware of any studies showing that FDI inflows (except perhaps by the indirect channel of creating currency appreciation).
In his blog, Mark says he consulted the Krugman & Obstfeld text before writing the Economist post. Does the book make a similar claim?
People, what am I missing here?