Scott Sumner, over at EconLog, recently wrote that “America can run trade deficits forever.” Scott is correct (although for reasons that I’ll not here get into, I believe that Scott is incorrect to suggest that the running of perpetual and healthy U.S. trade – or current-account – deficits requires that Americans consistently earn good returns on their investments abroad; such consistent and healthy U.S. ‘trade deficits’ are possible even if Americans invest nothing abroad).
Commenting on Scott’s post, “Phil” disputes Scott’s conclusion. “Phil” does so by telling a tale of two hypothetical countries, Squanderville and Thriftville, in which citizens of the former country foolishly and frequently finance irresponsible consumption today by borrowing resources from citizens of the latter. It is easy to show that citizens of the borrowing country, Squanderville, run up trade deficits year after year with Thirftville and that Squandervillians will one day be impoverished by having to repay their creditors in Thriftville.
But contrary to what seems to be “Phil’s” implicit assumption (or belief), a country’s trade (or current-account) deficit is emphatically not necessarily debt for the citizens of that country. That country D’s trade deficit can become additional debt for citizens of D is indisputable; that country D’s trade deficit is not necessarily additional debt for citizens of D is also indisputable despite the reality that very few people recognize this fact.
Below the fold is a slightly modified version of a comment that I left on EconLog in response to “Phil’s” comment.