Those who are financially gloomy usually fixate on deficits: the budget deficit, the trade deficit and the current account deficit (often mistakenly called the "balance of payments" deficit). First, the trade and current account deficits are by definition basically the same, since they are coming from the same basic sources and accounting. The difference is always microscopically tiny as a percent of GDP—currently 0.1% of GDP, or $17 billion. If you don't fear the one you don't fear the other. Surprise: These two deficits have nothing to do with currency values. Ours came to 5.2% of gross domestic product last year. Britain's was 5% of its gross domestic product. If these deficits determine currencies, how can the British pound be so strong? Over the last three years the U.S. trade deficit came to a cumulative 13% of GDP, identical to Britain's. Britain's three-year total is identical at 13%. So why is sterling so much stronger than the dollar? Do trade deficits lead to a weak economy? No, just the opposite, as was pointed out in the previous issue of this magazine (see "Trading Up," Mar. 14, p. 50).
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