… it is important to remember that China is a fast growing developing country. Ordinarily such countries are expected to run large trade deficits. The idea is that capital can be better used in fast growing countries like China than in slow growing wealthy countries. Since capital will get a higher return in developing countries, we expect capital to flow from rich countries to poor countries. The flow of capital would imply a trade deficit for developing countries. Effectively this trade deficit would allow developing countries to sustain consumption levels even as they build up their capital stock.
China, along with many other fast developing countries, is running a large trade surplus. This is not sustainable…
The other part of this story is that we really have no choice about seeing the dollar fall, especially for those ferocious deficit hawks who want to see the United States balance its budget. It is an accounting identity that the trade surplus is equal to net national savings. This means that if we have a trade deficit, net national saving is negative. There is no way around this fact. The deficit hawks may not like it, in the same way that they may not like 2 plus 2 being equal to 4, but there is nothing they can do to change it.
If we have negative national saving, then either we have a budget deficit (negative public saving) or we have negative private saving, or some combination. At the moment, we have a large budget deficit that corresponds to our trade deficit. How could we have negative private saving?