The U.S. trade deficit will exceed 5% of gross domestic product this year. A big trade deficit, combined with a low domestic savings rate, requires the U.S. to borrow heavily from abroad. We currently owe the world about 40% of one year's GDP―$4 trillion, something totally unprecedented. That figure will keep rising, with more of our own income going to service external debt. At some point, our creditors will have second thoughts. For two decades, economists have warned about the unsustainable trade deficit. To paraphrase the late economist Herb Stein, anything unsustainable won't be sustained. But will the rebalancing be a soft landing or a painful crash?
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