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March 02, 2006

Do we really have a trade deficit?

The cumulative U.S. trade deficit since 1980 is an astonishing $4.5 trillion. Many have predicted that this deficit will cause the dollar's value to plummet and interest rates to rise. N.C. State University economist Mike Walden explains one theory for why that hasn't yet happened.

"Two Harvard professors have a fairly controversial theory about why this hasn't happened. It's really based on the notion that we are mismeasuring our international position in the financial community," explains Walden, a professor with the Department of Agricultural and Resource Economics and a specialist with the North Carolina Cooperative Extension Service. "Certainly we do have a trade deficit -- no one is denying that. We are importing more than we are exporting.

"But what these professors do is they say, 'Look we also have investments around the world. We have investments in foreign countries; foreigners have investments here. And the U.S. is earning much more on its foreign investments than foreigners are here.'

"And when you take that into account, they argue, that it more than wipes out the trade deficit and in fact leaves the U.S. as a creditor nation -- not a debtor nation. And they argue that's why we haven't seen a big fall in the dollar and an increase in interest rates."

Posted by deeshore at March 2, 2006 08:00 AM