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The Cato Institute [2]‘s Dan Griswold [3] is one of the most astute trade analysts working today. Here’s his outstanding post today [4], on the trade deficit, at Cato’s blog. I especially like this paragraph:
According to the basic rules of supply and demand, the surplus of
global savings flowing into the United States each year to finance the
trade deficit puts downward pressure on U.S. interest rates. A new study [5]
from the National Bureau of Economic Research, “International Capital
Flows and U.S. Interest Rates,” by Francis Warnock and Veronica
Warnock, confirms the positive effect of international capital flows on
long-term U.S. interest rates. “Large foreign purchases of U.S.
government bonds have contributed importantly to the low levels of U.S.
interest rates observed over the past few years,” the authors
concluded. Specifically, they found that current inflows of foreign
capital reduce long-term U.S. interest rates by about 100 basis points,
or one percentage point.