Last week’s Economist had a nice survey on the odd patterns we’ve seen in the international flows of savings and capital over the past few years. Ordinarily, we’d expect to see savings and investment flow from rich countries (where capital is relatively abundant) to poor countries (where capital is relatively scarce). But that’s not what’s happening: the world’s biggest and richest economy is actually on the receiving end of savings generated by one of the poorest countries in the world. It’s as though we were watching water flow uphill.

It’s not really a mystery as to how that’s happening. As Brad Setser notes,

Today China is spending about 1% of its GDP a month to keep its currency from appreciating – it is on track to spend about 15% of its GDP fighting appreciation this year.  And unless something changes, it will do the same next year.

In the meantime, the US is running a current acount deficit of 6% of GDP, while at the same time running a government deficit of 4% of GDP. Neither of these deficits can be sustained indefinitely at these levels, so the question is how the transition will happen, and how painful it will be. Unsurprisingly, the discussion is dominated by US and European analysts who are concerned with how this will affect them (the Economist survey doesn’t mention Canada at all). So I’m going to see if I can figure out what we might expect.

Here’s a graph to set the stage (click for a larger image):

It turns out that Canada’s is the largest economy in the world to have surpluses in both the current account and the government balance. That’s probably better than being down in the lower-left-hand corner with the US, but is it a big enough cushion?