The Trade Deficit

Paul Blustein of the Washington Post discusses the trade deficit:

Trade Gap, by Paul Blustein, Washington Post: Newark, Del.: A $700 billion $ per year current account deficit sounds incredibly huge. How is this going to end?
Paul Blustein: This is a good question ... Some think it will be a "hard landing"--a financial crisis in which foreign investors dump U.S. securities en masse. Some think it will be a "softer" landing, in which foreigners just gradually insist on higher rates on their U.S. investments. And some people think the landing will be softer still, with the dollar just gradually easing down and trade flows reversing over time. ... I have to admit I find myself nodding my head when I hear economists say that the risks of a bad outcome are unacceptably high.

Virginia: ...[O]ne could make the argument that there are states in the U.S. that run trade deficits with other states or that there are U.S. cities that have trade deficits with other U.S. cities, and yet nobody worries or cares. So, why should one worry?
Paul Blustein: You're right to say that just because a country is running a trade deficit, or a budget deficit, or almost any other kind of deficit, that's not necessarily a reason to worry. ... Just like a company that borrows to finance the building of a profitable factory, there is no reason why governments and countries shouldn't borrow. However, ... when it comes to the U.S. trade deficit... the U.S. has a very high consumption rate and rather low investment rate at the moment. That means that instead of investing the foreign inflows in ways that will give us higher living standards in the future ... we're consuming most of the money. The second reason is the sheer size of the deficits, and the accumulated debt. ... That could certainly start to worry foreign creditors at some point if they see little chance that it will be turned around.

Washington, D.C.: Not a question--just a comment. These two pieces were terrific! Easily the best description and explanation of the inter-relation of the trade and saving questions that I have seen anywhere! Congratulations!  Alice M. Rivlin
Paul Blustein: Well, I can't resist posting this--for those of you who don't know, Ms. Rivlin is a former vice chairman of the Federal Reserve. Thanks very much... [Here are the links: U.S. Trade Deficit Hangs In a Delicate Imbalance, As U.S. Trade Gap Grows, So Do Asian Banks' Foreign Reserves, Mark]

Northville, Mich.: Why is it the U.S.A. deficit has gone so long uncheck that we now owe every country around the world boat loads of money. Is it that this administration is so corrupt and greedy it does not care?
Paul Blustein: Actually, I think some people in the administration care quite a bit about the problem. Not all--some think the problem is overblown, and some of their rhetoric has certainly reflected that. But in talking to people like Tim Adams, the undersecretary of the treasury for international affairs, I'm quite struck by the fact that he seems determined to take measures that will ameliorate the global imbalances. ...

Monroe Township, N.J.: Why is China willing to hold a large part of US debt? Can they use the debt aggressively against us?
Paul Blustein: ...The Chinese are "willing" to hold our Treasury securities for one important reason--for the past decade or so, they have rigidly linked their currency, the yuan, to the U.S. dollar, ... As for the second part of your question, if you read Saturday's story, ... I quoted from a Foreign Affairs article by Nouriel Roubini and Brad Setser. They pointed out that the Chinese COULD use their vast holdings of Treasury securities against us, by threatening to dump them, in some sort of foreign policy confrontation. Of course, that would hurt the Chinese a lot--perhaps more than it would hurt us; it's hard to say. But one way of thinking about this is that it's a sort of "balance of mutual terror"--a term used by former Treasury Secretary Larry Summers. It's not a very healthy situation, in other words.

Burke, Va.: In his recent book recent book "Three Billion New Capitalists" Clyde Prestowitz's argues that the trade deficit in combination with budget deficits and a debt-dependent economy will result in an "economic 9/11" where the dollar collapses and interest rates sky-rocket. What ...  changes in policy would be necessary to avert these sequences of events?
Paul Blustein: ...I think there's pretty broad agreement among economists on both the right and left about what ought to be done. First of all, the U.S. needs to increase its savings... Second, Asian countries need to raise the value of their currencies. ... Third, Europe needs to take steps to increase its growth, so that Europeans would import more too. But Europe is a far smaller part of the global imbalance problem than is Asia. ... Not all economists agree, of course, but the consensus is pretty broad. ...