South By North Strategies, Ltd.

In a recent report, the Center for Economic and Policy Research explain “7 things  you need to know about the national debt, deficits, and the dollar.” One of the seven issues considered in the paper is how the trade deficit resulting from a high dollar policy drives the budget deficit.

A large trade deficit requires that we either have a very large budget deficit or extremely low private savings or some combination. This is an accounting identity. If we are borrowers internationally then we must have very low domestic savings. And we are borrowers internationally because we have an over-valued dollar. In other words, the high dollar requires us to either have large budget deficits or to have low private savings.