The Intertemporal Budget Constraint of a Country

In this chapter, Professor Sachs talks about the longer-term implications of capital flows. The current account balance gives a snapshot of how a country is acting at any moment in time. In order to understand how trade deficits and surpluses evolve over time, one can look at the flows for the United States over long periods of time; the net international investment balance of the US is negative. Countries as a whole can go bankrupt, and examples are given, such as after World War I. In history, countries that went bankrupt lost sovereignty. There are measures a country takes to save itself from a debt default situation, including bankruptcy courts and creditor clubs, because such a situation can have a negative impact on the national budget. The chapter ends with three examples of austerity crises, in Bolivia, Poland, and Greece.

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