Does the Trade Deficit Threaten the Dollar?
The United States current account has been in deficit continuously for 30 years. The last sustained surpluses were in 1975. Why did the United States start falling into chronic current deficit at that time? The answer at first was surely the oil shock of 1974, which itself followed the devaluation of the dollar in 1971 (effectively devaluing oil, which was priced in dollars), and the collapse of the Bretton Woods system in 1973. The result after 1974 was a vast recycling of “petrodollars” through the commercial banking system, and the creation of the modern world of a dollar-reserve system of global finance, mediated mainly by private financial markets. From 1982 onward, the new dollar system was consolidated under a regime of high interest rates and, after 1986, low oil prices. High real interest rates and domestic recession in the early 1980s destroyed vast sectors of traditional American manufacturing strength, particularly in the machinery and metalworking industries of the upper M
