Why is the U.S. running a large trade deficit, and who is financing that deficit?
The U.S. is running a large trade deficit because it consumes lots and saves little, while the rest of world tends to consume less and save more. Consequently, we end up importing more goods than we export, and we borrow from the rest of world – effectively, importing their savings — to make up the difference. This imported savings helps to finance the federal government’s budget deficit, helps to provide the credit that allows consumer spending to rise faster than household pay and helps to finance business investment here in the U.S. In the process, we are running up our external debt – that is to say the debt the U.S. owes to the rest of the world – at a very rapid pace. A very large share of the money we need to run a trade deficit comes from foreign central banks, not from private investors. Two economists at the New York Federal Reserve Bank, working off data collected by the Bank of International Settlements, recently estimated that foreign central banks provided $440 billion o
