Number: RS21951
Title: Financing the U.S. Trade Deficit: Role of Foreign Governments
Authors: Marc Labonte and Gail Makinen, Government and Finance Division 
Abstract: The nation's trade deficit is equal to the imbalance between national investment and national saving. National saving is the sum of household saving, business saving, and public sector saving (a budget deficit equals public sector borrowing). In the 2000s, the gap between national saving and investment widened, largely because of a fall in private and public saving, causing the trade deficit to widen. (It fell somewhat in 2007 relative to GDP.) To finance the trade deficit, foreign capital must flow into the United States. Net private capital inflows have not grown over this period, however, to match the widening gap between saving and investment. To finance the growing trade deficit from 2002 through 2007, official capital inflows became increasingly important, as central banks in a few Asian and oil-producing countries purchased U.S. assets to moderate or prevent their currencies from appreciating against the dollar. Net official capital inflows were close to $400 billion in 2006 and 2007. If total net capital inflows should decline, the dollar and trade deficit would decline, U.S. interest rates would rise, and U.S. spending on capital goods and consumer durables would fall, all else equal.
Pages: 6
Date: Updated May 20, 2008