The NYT had an article on how the U.S. is likely to wane as a global power, without ever once mentioning the trade deficit. It even quoted Larry Summers, the head of President Obama's National Economic Council saying: "“How long can the world’s biggest borrower remain the world’s biggest power?” without mentioning the trade deficit.
If the United States government had a large budget deficit, but no trade deficit, then it would mean that the money was being borrowed domestically. In this story, the United States government could be the world's largest borrower, but it would mean that its population was the world's largest lender. What would matter in terms of its international position would be its relative rate of productivity growth (which has been respectable in recent years).
However, the United States has been running large and unsustainable trade deficits in recent years because of the over-valued dollar. The trade deficits, not the budget deficits, have caused the country to become the world's largest debtor that Mr. Summers complained about. If the dollar and GDP were both at their current levels and the budget was completely balanced, we would be borrowing just as much money from abroad as we are today. Failing to discuss either the trade deficit or the value of the dollar in this context was an enormous oversight.
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