ABSTRACT
For decades, the United States has been the most highly indebted nation in the world, and that trend has worsened over time. The federal deficit currently runs at about one trillion dollars per year, and this accumulated debt held by the public is approaching 20 trillion dollars, or about $130,000 per capita. Concurrently, the United States has also been running large trade deficits, especially with China. These are not unrelated phenomena. In fact, they are inextricably related through national income accounting identities. Because the United States consumes more than it produces, the differential is necessarily made up through imports. China, on the other hand, produces more than it consumes, and its surplus production manifests itself through exports. China’s persistent trade surpluses have resulted in foreign exchange reserves equivalent to $3 trillion dollars – by far the largest in the world. Much of this financial wealth is denominated in U.S. dollars, and finds its way back to the United States, often in the form of investments – both in terms of U.S. Treasury bills and other financial instruments, and in the form of investments in physical assets, such as real estate or business enterprises. Both countries have gained from this asymmetric economic relationship to a certain extent: China has boosted its productivity and wealth while the U.S. consumers and others have benefited from the availability of lower-priced goods than they might otherwise have access to. This asymmetric economic relationship, however, is ultimately not sustainable over the long run, as U.S. wealth dissipates and its creditworthiness is undermined. While the temptation to blame China is strong, the more forthright solution is to reduce federal deficits and increase private sector savings at home.
