Trump’s Achilles’ Heel
First, some background. For many years, the United States has run large deficits on both its current account and its public finances. These deficits must be financed by substantial inflows of foreign capital. If this inflow proves insufficient, two effects occur: the US dollar depreciates and US interest rates rise.
Under normal circumstances, financing these so-called “twin deficits” does not pose a major problem for the United States. This is because the dollar serves as the world’s reserve currency and the US economy generally grows faster than most others. As a result, relatively high returns can be achieved in the US. This explains why the United States has been able for many years to sustain large current-account and fiscal deficits without significant difficulty.
The next step is...
