In the last 60 years, the US has underpinned global growth by running persistent current account deficits. Under the Bretton Woods system, the US ran deficits that enabled war torn Europe and Japan to rebuild.

China is running external surpluses because its saving exceeds its investment. The US is running external deficits because of a national savings shortfall, which once reflected spendthrift households but now is the fault of a feckless government.

Suddenly, the world turned upside down rich countries were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while poor countries were running surpluses and accumulating large stocks of external assets, including financial claims on Western economies.

First, consumption has to give way smoothly to investment, as past excess capacity is worked off and as expansionary policies in industrial countries normalize. Second, to reduce the current account imbalances that have built up, demand has to shift from countries running deficits to countries running surpluses.

The situation today is very different from that in 1998, when Russia was running twin fiscal and current account deficits. Russia needed to borrow, and it was borrowing heavily in foreign currency.

If America s Democrats lose in the mid term elections this November, there is a risk of persistent fiscal deficits as Republicans veto tax increases while Democrats veto spending cuts. Monetizing the fiscal deficits would then become the path of least resistance running the printing presses is much easier than politically painful deficit reduction.

America s Three Deficits

Loving America s Deficits

Meanwhile, governments were running large deficits a legacy of the economic downturn which renewed growth was supposed to shrink. In the eurozone, countries like Greece faced sovereign debt crises as bank bailouts turned private debt into public debt.

Good and Bad Deficits

Attention switched to the problem of fiscal deficits and the relationship between deficits and economic growth. Should governments deliberately expand their deficits to offset the fall in household and investment demand?

Meanwhile, the jewel of American capitalism, the financial sector, caused the crisis and is underpinning the US current account deficit. Oil exporters aside, countries running current account surpluses, such as China, Germany, and Japan, have stronger manufacturing sectors relative to their financial sectors, while the relationship is reversed for countries running external deficits, such as the US and the United Kingdom.

For the last decade, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were the eurozone's consumers of first and last resort, spending more than their income and running ever larger current account deficits. Meanwhile, the eurozone core (Germany, the Netherlands, Austria, and France) comprised the producers of first and last resort, spending below their incomes and running ever larger current account surpluses.

We have vast budget deficits.

America u0027s Other 87 Deficits

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Japan offset private deleveraging in the 1990s by running massive public deficits. The US has pulled out of recession faster than the eurozone, not only or even primarily because it fixed its banking system faster, but because it pursued more stimulative fiscal policies.

Mitt Romney and America s Four Deficits

Who Will Run the World s Deficits?

Cash deficits of closed peacekeeping missions

The flaw in the system was that it underpinned global economic expansion for only as long as the US was willing to provide dollars by running up deficits the same deficits that would eventually undermine America s ability to maintain the 35 ounce gold price. In 1961, the US responded by creating the London Gold Pool, which obliged other countries to reimburse the US for half of its gold losses.

Moreover, an important advantage of fiscal devaluations is that they generate additional revenues in proportion to the country s trade deficit. For countries that are suffering from weak competitiveness and, as a consequence, running trade deficits, this typically means more revenues, especially in the short run.

Furthermore, East Asia s growth model has been sustained ultimately by mobilizing rising domestic savings and pumping out exports. So, although India might initially absorb some international capital, it might ultimately prefer to build foreign reserves by running small external deficits or even a surplus.

It is quite right to argue that governments should aim only to balance their budgets over the business cycle, running surpluses during booms and deficits when economic activity is weak. But it is wrong to think that massive accumulation of debt is a free lunch.

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Tired of go go growth, voters now look for more attention to addressing environmental concerns, health care issues, and income inequality. But achieving these laudable goals will be expensive, coming on top of the giant budget deficits the US is running to counter the financial crisis.

India is running high current account and fiscal deficits food price inflation is in the double digits and the rupee has weakened. As for trade with China, The Economist points out that for every dollar s worth of exports to China principally raw materials , India imports three.

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Running Individual Modules

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Running in Place

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Yet the US found a way to finesse this problem. Exploiting what 160 Valéry Giscard d Estaing called the exorbitant privilege of the world s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance of payments, or current account, deficits to attract foreign capital.

Yet the US found a way to finesse this problem. Exploiting what Valéry Giscard d Estaing called the exorbitant privilege of the world s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance of payments, or current account, deficits to attract foreign capital.

Third, in countries running current account deficits, consumers need to cut spending and save much more for many years. Shopped out, savings less, and debt burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt service ratios, and falling incomes and employment.

In fact, US trade deficits are primarily the result of insufficient, mainly government, saving not a misaligned exchange rate, as economists have led policymakers to believe. Large US budget deficits during Ronald Reagan s presidency generated the famous twin fiscal and trade deficits of the 1980 s.

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