The 'Pitchford Thesis' also known as the 'consenting adults' thesis was popularised by Professor John Pitchford in the early 1990s.
Pitchford noted that Australia's CAD and foreign liabilities are almost entirely generated by the private sector (the private sector accounted for 99% of Australia's net foreign debt in 2008). He argued that the foreign borrowings helped to fund private investment projects, or are direct investments in firms and ventures by foreign residents. So long as private sector decision making is not disorted by other factors, individuals and firms make proper calculations of the risks and costs of borrowing from overseas, and borrowers and lenders are responsible for their own decisions - in other words they are 'consenting adults'.
In terms of the question you asked here are some things you can consider:
Why external performance isn't a problem:
- basically Australia has very low domestic savings, therefore they are forced to borrow from overseas. As long as the money borrowed from overseas goes towards funding things such as infastructure and/or capital equipment, foreign liabilities can be seen as sustainable as these things will contribute towards the expansion of Australian GDP - and we all know economic growth = more money!
- also as Australia is a young country we need to borrow from overseas in order to fund our economic growth. A high CAD and foreign liabilities level doesn't necessarily mean we're in the shits. During the 1990's Australia recorded sustainable economic growth, low inflation, falling unemployment and experienced no loss in foreign investor confidence even though we were experiencing high current account deficits and rising foreign debt.
Why external performance is a problem:
I won't go into too much detail with this as this question has already been answered in previous posts and is generally the easier question of the two to answer. However, a high CAD and high foreign liabilities can be a problem due to the following:
- Increased debt requires a larger percentage of our GDP, lowering the amount of income we have to invest domestically (thus lowering our quality of life and ability to grow as an economy). Take a look at the debt servicing ratio.
- It can act as a deterrent to foreign lenders in terms of our credit rating, where failure to pay back debts will cause foreign lenders to charge higher servicing costs (interest rates) on loans, increasing our foreign debt, and making it harder to pay back loans. (Check out debt trap scenario)
- Can possibly result in a loss of confidence in foreign investors, and in result a fall in the value of the Australian dollar. This in turn will make servicing costs on loans more expensive. It can have a positive effect as exports are more internationally competitive, however it will also cost more to buy imports (thats baad).
Hope some of that helps.