Both the trade and budget balance were in roughly zero until the 1980s

Both the trade and budget balance were in roughly zero until the 1980s when the budget deficit increased dramatically and the U.S. trade deficit increased dramatically.

However, during the late 1990s the budget deficit shrank—in fact, moving to surplus—at the same time that the U.S. trade deficit increased significantly. Since 2000, the budget deficit has increased significantly, particularly after 2008.What is the relationship between a country’s trade balance and its stance as a borrower or lender? Historically, has the U.S. been a net lender or net borrower? Why do you think that this is? Do you think that the U.S. budget situation might have anything to do with this?

ANSWER

Countries that run trade deficits must borrow from other countries to pay for this. Thus, countries that run trade deficits are net borrowers. The huge budget deficits in the U.S. coupled with its high levels of consumption (and low savings) have led it to becoming the largest debtor nation in the world. Large trade deficits have occurred during the same time that the U.S. has also been running large budget deficits, indicating that there may well be some cause and effect between the two.