To what extent is the large trade deficit reported for the U.S. a cause for concern? In my Bubbleheads essay a couple months back, I discussed some of the fears about the deficit and the apparently-overvalued dollar.
So there you have it. Some of America's trade deficit is not really there--the result of errors and omissions in the data, a "statistical discrepancy." Some of America's trade deficit is there, but is not "unsustainable": the portion of America's trade deficit that is the result of its three "exorbitant privileges" can continue until the age of the world changes: American can keep selling international reserve and liquidity services, political risk insurance services, and future immigration options to the central banks and rich of the rest of the world for a long time to come.
For Discussion. One challenge is to measure the extent to which the value of the dollar--and hence the trade deficit--reflect political risk insurance. Could event studies of the behavior of the dollar in response to incidents in the war on terrorism help sort this out?