Your assertion - indeed, your core premise - is badly flawed.
U.S. foreign trade went into deficit in the 1970s and never recovered; in recent years, the American trade deficit has ballooned to half a trillion dollars a year. To make matters worse, the U.S. federal government has been running enormous deficits most of the time since the Republicans discovered fiscal irresponsibility under President Reagan in the 1980s. There was a successful attempt to move back to balanced budgets under Bill Clinton in the mid-to-late 1990s, but under George W. Bush the annual budget deficit attained a new record of more than half a trillion dollars within two years.
Normally, huge budget deficits cause roaring inflation, which forces central banks to raise interest rates and rein in the rampant government borrowing (at the expense of killing growth in the rest of the economy as well). Normally, too, an enormous foreign trade deficit will cause the external value of the currency to drop like a rock, forcing the guilty government to slash imports - and, once again, to jack up the local interest rate in an attempt to attract foreign funds and stabilize the currency. But in the United States, none of these things has happened. The entire economy is sustained by an inflow of foreign capital so enormous that it covers the entire trade deficit and also, one way and another, the budget deficit.
It is the Indian Rope Trick conducted on a national scale. Well-to-do Americans reward themselves with massive tax cuts, the government goes on spending like there is no tomorrow - and the party will never have to end *so long as foreigners, almost all of them in Europe or East Asia, are willing to keep pouring their money into the United States*. Why do they do that, and is there any risk that they might stop?
They do not do it for the allegedly higher returns available in the U.S. stock market: a third of the inflow of foreign capital goes straight into relatively low-yielding bonds, and most of the rest into blue chips. They do it because they see the United States as the safest place to park their money. It is the centre of the world economy, after all, and the dollar is the world's reserve currency. But there is a dangerous circularity to this argument: the foreigners go on investing because the U.S. economy is strong, and it remains strong only because they continue to invest. What if one day the huge budget deficit caused the confidence of the foreign investors to falter? It would suddenly become clear that the emperor is wearing no clothes - and the sky would fall.
In mid-2004, the total amount of foreign money invested in the United States in forms that could be sold off fairly quickly was $8 trillion. If those investments started to move out, the U.S. dollar would fall so fast that the dollars that moved on Day Two of the panic might be worth only half as much in euros or yen as the dollars that moved on Day One. Nobody would win in such a panic, neither Americans nor foreigners, so the latter has almost as great an interest in pretending that the emperor is fully clothed as the former. Nevertheless, the markets have a way of discovering the truth sooner or later: the U.S. dollar's steady fall since the beginning of 2003 has already inflicted such losses on exporters who denominate their prices in dollars (like the oil producers) that its continued status as the world's main reserve currency, used for most international transactions, is becoming doubtful.
The U.S. economy is a confidence trick based on everybody else's perceptions that the United States is centrally important for the world's security and that its economy is equally central in the global economy. Both those propositions were true in 1945; neither is actually true any more.
(cont.)
