CSI Trade Deficit As Only Paul Krugman Could Write It

You must read it all (well, you don't have to, of course, but it would be nice... ::cough::) but here's a snip-snip brought to us by Rozius:

Forensics are in. If you turn on the TV during prime time, you're likely to find yourself watching people sorting through clues from a crime scene, trying to figure out what really happened.That's more or less what's going on right now among international finance experts.

The crime in question is the U.S. trade deficit, which according to the broadest measure reached an amazing $805 billion last year.

The mystery is how we've been able to run huge deficits, year after year, with so few visible adverse consequences. And the future of the U.S. economy depends on which of two proposed solutions to the mystery is right.

Here's the puzzle: the trade deficit means that America is living beyond its means, spending far more than it earns. (In 2005, the United States exported only 53 cents' worth of goods for every dollar it spent on imports.)To pay for the excess of imports over exports, the United States has to sell stocks, bonds and businesses to foreigners. In fact, we've borrowed more than $3 trillion just since 1999.

By rights, then, the investment income — interest payments, stock dividends and so on — that Americans pay to foreigners should be a lot larger than the investment income foreigners pay to Americans. But according to official statistics, the United States still has a slightly positive balance on investment income.How is this possible? The answer, almost certainly, is that there's something wrong with the numbers. (Laypeople tend to treat official statistics as gospel; professional economists know that putting these numbers together involves a lot of educated guesswork — and sometimes the guesses are wrong.) But depending on exactly what's wrong, the U.S. economy either has hidden strengths, or it's in even worse shape than it seems.