The "Twin Deficits"

Which would you rather have - a positive balance of trade and 1% or less GDP growth like Germany and Japan or a growth rate closer to 4% while running a large trade deficit?

The misconceptions repeated without thought in the press are repeated so often that people start assuming that somehow they are true. For example the notion how the rest of the world is buying US financial assets out of the goodness of their heart and might change their mind about it sometime soon.

The simple fact of the matter is that if China wants to sell dolls to Wal-Mart, it will receive dollars in return. It has only two things it can do with those dollars - it can buy goods in the US or it can buy USD denominated financial assets. That is it, period, end of story. (If they sell their dollars for Euro or Yen that only passes the "problem" one step to the next holder.)

So unless they want to keep their cash under the mattress the foreign central banks will continue to buy US Treasuries as long as foreign companies continue to sell to Americans.

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