Then, Scheiber goes on to argue that the “dollar strength over much of the last few decades has bloated the U.S. trade deficit.” This is not so.
The negative external balance in the U.S. is neither a “problem,” nor has it been caused by the dollar’s “strength” and “overvaluation.” The U.S.’ negative external balance, which the country has registered every year since 1975, is “made in the USA.” It is a result of our savings deficiency.
To view the external balance correctly, one must look to the domestic economy. The external balance is homegrown: It is produced by the relationship between domestic savings and domestic investment. Foreigners only come into the picture “through the backdoor.” Countries running external‐balance deficits must finance them by borrowing from countries running external‐balance surpluses.
It is the gap between a country’s savings (read: income, minus consumption) and domestic investment that drives and determines its external balance. This fact can easily be seen by studying the savings‐investment identity: CA = Sprivate – Iprivate + Spublic – Ipublic. CA is the current‐account balance, Sprivate is private savings, Iprivate is private domestic‐investment spending, Spublic is government savings, and Ipublic is government domestic‐investment spending. In this form, Sprivate – Iprivate is the savings‐investment gap for the private sector and Sprivate– Ipublic is the savings‐investment gap for the government sector.