Austerity is a Lie.

[HiPointDem]

14. We don't stop deficit spending because we're running trade deficits (strong dollar policy).

By definition, total national saving is equal to the trade surplus. When we have a trade deficit, that means that the country on the whole is on net a borrower. This just logically follows from the notion that if we are buying more from abroad than we are selling, then we must borrow to cover the difference.

This means that either the public sector must be borrowing, meaning that we have
government budget deficits, or the private sector must be borrowing, which would correspond to a situation where we had very low household savings.

In the last decade we have seen both scenarios. We currently have very large government budget deficits. In this case, the government is doing the borrowing that corresponds to our trade deficit.

However, before the collapse of the housing bubble, when budget deficits were relatively low, it was the private sector that was doing most of the borrowing. This was due to the consumption boom that resulted from the $8 trillion in housing bubble-generated wealth. Consumers spent based on this illusory bubble wealth, sending the household saving rate to zero at the end of the 1990s, when the wealth created by the stock bubble led to another consumption boom that caused the saving rate to fall to what was at the time a record low.

There is no way to escape the simple accounting identity that national savings is equal to the trade surplus. This means that if we want the budget deficit to be brought down, and we don’t want to see private savings collapse, as they did during the years of the stock market bubble and the housing bubble, then we must want to see the trade deficit fall. This in turn means that we must want to see the dollar decline since there is no other plausible mechanism for bringing about large reductions in the trade deficits.


http://www.cepr.net/documents/publications/debt-2011-06.pdf