The U.S. current account balance has been in deficit continuously since the early 1980s. This is not something new. During the 1880s, the United States had many years of current account deficits. They were matched by financial account surpluses as the rest of the world sent financial capital to the United States to finance the building of railroads and the development of the trans-Mississippi West. By the early 1900s, the United States accumulated a long string of current account surpluses. By World War I, Americans had repaid all of their external debt and had become a net creditor. Whenever America is in deficit on its current account, it is in surplus in its financial account and vice versa.

Contrary to popular belief, the United States does not have a trade deficit because it is a weak economy and cannot compete in world markets. Rather, the United States appears to be a good place in which to invest financial capital because there are strong prospects for growth and investment opportunities. So long as there are more foreigners who wish to invest in the United States than there are Americans who wish to invest abroad, there will be a deficit in our current account balance. Americans are beneficiaries of international capital flows.

Why are politicians, nonetheless, so worried about the international trade deficit?